Considerations when downsizing your home

Video transcript

DIANA: Welcome to the ‘Q&AMP: Understanding retirement’ series, I’m Diana Mousina, a senior economist at AMP Capital.

Today I’ll be talking with financial adviser John Dani about downsizing your home and the factors to consider when examining this option. So John, what are the main reasons you’ve found that people downsize their home?

JOHN: Downsizing can be a really effective way to free up some extra money, particularly in retirement.

The other reason people go into downsizing is for lifestyle reasons. Many people want to live in a different area, they want to be closer to family, or quite frankly, they just want to have a smaller place, or a lower maintenance place in their retirement.

DIANA: So if someone wants to go ahead with downsizing, what do you think are some of the key factors they should consider?

JOHN: There are three main factors. It relates to hidden costs, it relates to age pension and it's also about having a clear plan for the money.

There are many hidden costs associated with buying, selling and moving home. These include; legal fees, real estate agent fees, stamp duty, removalist costs and even storage costs, if you need to store your belongings temporarily.

If you’re on the age pension, you'll need to realise that the money that you've gained from downsizing will count towards your means test. And therefore, it could result in a reduction, or even the cancellation, of your age pension. So it's critical to understand the impact of downsizing on your government entitlements.

And last of all, it's crucial to have a clear plan, what to do with the money that you've received from downsizing. Are you going to pay off debt? Are you going to contribute into superannuation? Are you going to spend the money on some lifestyle assets?

What we find is that, unless you have a clear plan with the money you're going to gain from downsizing, it's all too easy to spend it frivolously on non-essential expenses.

DIANA: You mention contributing into super. How does that work?

JOHN: The ability to make downsizer contributions are actually relatively recent. If you’re aged over 65 and you’ve lived in your family home for 10 years or more, you can contribute up to $300,000 individually, or $600,000 as a couple, from the sale of your home into superannuation.

Now, this can really help to boost the income that you can generate in retirement. It's important to realise that there are other eligibility criteria that need to be met, so it’s really important to check these before you make any decisions.

If you're thinking of downsizing your home before or during retirement, there are a number of things to consider, from super contributions to Age Pension entitlements.

Retirement can be an exciting new chapter, offering you the chance to fulfil those travel dreams or focus on a hobby. If you’re one of the Aussies who owns their home outright, you might be thinking of downsizing your property – selling the family home and buying a cheaper, or smaller place – to help those dreams become a reality.

But downsizing isn’t simply a matter of packing up and moving house. Here are a few things to consider when deciding whether it’s right for you.

Motivations for downsizing

A recent survey from the Australian Housing and Urban Research Institute shows that 26% of Australians aged 55 and older have downsized their homes, and 29% have thought about doing it. This has been motivated by both lifestyle and financial reasons1.

For example:

  • The property may be worth a lot of money and downsizing releases some of this, to free up cash for other things.
  • A smaller space can be less to maintain and insure, rewarding downsizers with extra money, time, and resources.
  • A smaller home could also better suit changing needs.

There may be implications for your Age Pension entitlements2 , if you sell your home, so it’s a good idea to check with a financial adviser to understand your eligibility requirements.

Downsizer contributions into superannuation

Depending on your financial situation and goals, some of the money from the sale of your property could be added to your super. If you’ve owned your property for 10 years or more and are 65 years or older, you may be able to contribute up to $300,000 from the sale of your family home into your super3, without having to satisfy the usual work test requirements and without affecting your annual contribution caps.

For couples, both spouses can make the most of the downsizer contribution opportunity, which means up to $600,000 per couple can be contributed toward super.

Don't forget about the costs of moving 

While downsizing can free up capital, some of the cash you receive from the sale of your property may be needed for the cost of moving, so you’ll need to factor in legal and real estate agent fees and removalists. Another important consideration is stamp duty (the tax on the total value of the property you buy). This varies from state to state. AMP’s stamp duty calculator can help.

Lifestyle considerations before you downsize

Apart from the financial considerations, there are lifestyle factors that could affect your decision to downsize:

  • Flexibility: Moving to a smaller property may mean less maintenance, but it could also give you less flexibility in terms of family being able to stay or storage space. 
  • Proximity to family and friends: Your existing home may be close to family and friends, so if you’re planning to change location it may affect your day-to-day life.
  • Emotional ties: Leaving a family home behind can be emotionally challenging as it’s likely to have been a place with many special memories.

Other options for retirement living

Purchasing another, smaller home isn’t the only option for retirees. You may be considering moving to a retirement village or even aged care, depending on your needs. These will have different costs or fees compared with purchasing a standard property. Before you make a decision, there are a number of key things to consider about different retirement living options.

Ask the experts

Downsizing during or leading up to retirement isn’t always straightforward, so, if possible, speak to your financial adviser about the best options for you. If you don’t have a financial one, you can contact us on 131 267 or find an adviser online.

1 Australian Housing and Urban Research Institute, The University of Sydney (2020): The Downsizing Patterns and Preferences of Australians Over 55.
2 Australian Government Department of Veterans’ Affairs : How owning a home can affect pensions and payments
Australian Taxation Office: Downsizing contributions into superannuation


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