Thinking of downsizing? It might not be your best or only option

Downsizing is a common strategy in retirement and while selling up and moving to a smaller, more manageable home can be a good solution for some, for many it is often driven by the need to access funds rather than a change of lifestyle.

There are a number of things to consider if you are thinking of downsizing such as the less-visible costs of selling as well as the emotional impact of moving away from your home of many years, local neighbourhood, and friends.

You also need to understand that if you have sufficient equity in your home, downsizing may not be your only or best option.

There are a number of costs to selling up and moving including real estate agent fees, stamp duty on a new home purchase, legal fees, and furniture removal which can run into tens of thousands of dollars and on higher end properties, hundreds of thousands.

There are of course many benefits to be gained from downsizing including increased cash flow, and a smaller property that is easier to maintain and likely cheaper to insure and run, particularly in relation to electricity costs.

You do need to take into account your future plans and needs – not only in relation to your finances – but how far away you will be from family and friends and important amenities such as health care, shops, and transport.

If you do decide to sell and receive a lump sum of cash as the proceeds of sale, you need to be aware that this may also impact the amount of Age Pension you receive.

Living in a smaller, less expensive property also means that you probably won’t be able to take all of your possessions with you.  And if property prices continue on as they have in recent years, you will no longer benefit from the same level of capital growth as you would on a higher value property.

According to Scott Phillips from specialist reverse mortgage brokers Your Home Equity, the decision to downsize was often a result of people feeling they had no other options open to them.

“We’ve seen it time and again, clients need access to funds, but they don’t want to leave their home.

“They might be particularly attached to the area and leaving would uproot them from their community and friends.

“It might also be that they need a lump sum of money so they can carry out maintenance or renovations on the home that they love.”

Scott said that accessing some of the stored value in the home could be a sensible alternative to downsizing or even delaying downsizing for a few more years – which could make all the difference to people.

“It’s important to understand that once the costs of buying and selling are spent, you never get them back.

“And if you buy and sell in a similar market, you remain exposed to the same asset class of Australian residential real estate.

“It follows that if you currently live in a more expensive house that is likely to go up in value by four or five percent over the next few years compared to a house half the price that is increasing in value by the same amount, it makes more sense to stay put and get some good advice about accessing some of the value in your home now – and financially smoothing out your retirement.”