Downsizing the family home and when to look for a new place

Downsizing your home can be a difficult decision and is prompted for many different reasons: it may be the kids moving out, the opportunity to travel or because you want to move closer to grandchildren. But in many cases, downsizing is driven by the goal to free up equity to help cover living expenses in retirement and reduce the costs associated with maintaining a large family home. With so much to think about, how do you decide when and where to make the move?

If you want to downsize, start thinking about it early

While it’s natural to start with looking at the lifestyle you want, that shouldn’t be your first focus – especially if you’re moving to a rural area or making a sea change. First, look at the infrastructure in the area you are considering – where’s the closest grocery shop or tennis club? Then think about the type of property that will suit your next stage in life – is this just a 10-year plan or are you looking for something that incorporates accessible living and could take you through retirement?

All these aspects will have a big impact on your quality of life as well as living expenses in the future. It’s also vital to consider how close your social networks are, such as family or friends. If you’re starting fresh, allow for the time it will take to create and invest in rebuilding valuable social connections.

And in particular, don’t overlook proximity to medical facilities and public transport. Considering these two aspects upfront can save you money and hassle. This can be particularly important if you are considering a sea or tree change to a less populated area. For instance, if you don’t have access to a specialist and your health deteriorates in the future, you may need to move back closer to town – an emotional and often difficult task when presented with a health challenge. 

Do your sums as downsizing may not free up as much cash as you think

Downsizing is often driven to free up equity as the extra cash can boost the funds available for everyday expenses and future health care. But it’s important to do the sums on the changeover costs, stamp duty, and agent and legal fees, as you may not free up as much cash as you think. For instance, selling a $1 million property may (in today’s rates) cost about $20,000 in agent fees, while purchasing an $800,000 house in New South Wales may incur around $32,000 up front for stamp duty, leaving you with less than $150,000.

If your investigations show that you won't have enough left over, you may decide to reassess the suburbs, towns or property type on your preferred list. If this means you are further away from medical facilities, you may decide it's not worth doing at all. Regardless, figuring it out sooner is important because you don’t want to be in the situation where you must sell – a forced sale is stressful and could mean you may have to accept less than the ideal price.

Also, consider how money from the sale can complicate your eligibility for the age pension

Proceeds from the sale of the family home are exempt from Centrelink’s assets test for 12 months but amounts are deemed under the income test. This exemption only applies to the amount you’re planning to use to buy a new home.

For example, if you sell your house for $1 million and want to buy a home that’s worth $600,000, then it’s the $600,000 that will be exempt from the asset test for 12 months. The remaining $400,000 from the sale is not exempt and counts towards the assets test. This increase in assets could impact your eligibility for the age pension and, as such, it may be beneficial to speak with a professional financial adviser.

There’s no magic number for determining when downsizing is financially right for you

It all comes down to what level of income you need. If your nest egg is small, an extra $100,000 could make a big difference to your standard of living, particularly if the downsizing also allows you to reduce ongoing home maintenance costs. If you’ve got a strong level of income relative to your needs it may be the lifestyle change that appeals to you. No matter what the driver – the best place to start is by working out how much income you need in retirement and working backwards from there.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Ishara Rupasinghe

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Ishara Rupasinghe has been with the firm since 2007 and is a director of the Family Wealth Management team in Canberra.

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