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. And let's face it, many retirees have seen their retirement savings battered by the downturn in the sharemarket and despite signs of a gradual recovery, many retirees may look at downsizing as a way to boost their available savings 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 factors to think about, 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 purchasing a cheaper, usually smaller dwelling – 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 if it’s right for you.

Motivations for downsizing

A recent survey from the Australian Housing and Urban Research Institute1 indicates that more than half of Australians aged 55 and older have either downsized or thought about doing it. Their main motivators are made up of both lifestyle and financial reasons2.

For example:

  • The property may be worth a lot of money and downsizing releases some of the capital tied up in a long-held home freeing up cash.
  • It provides a more modest space to maintain and insure, rewarding downsizers with additional time, money and resources.
  • A smaller home could mean a change of pace that better suits changing needs.

There may be implications for your Age Pension entitlements if you sell your home, so check with a financial adviser to understand your eligibility requirements.

Cash from the sale to top up super

Depending on your financial situation and goals, some of the money from the sale could be added to your super. If you’ve owned your property for 10 years or more, 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.

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 factor in legal and real estate agent fees, and removalists. Another important consideration is stamp duty, which is a tax on the total value of the property you buy. The percentage that’s payable varies from state to state. AMP’s stamp duty calculator can help.

Lifestyle considerations before downsizing

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

  • Moving to a smaller home may mean less maintenance, but it could also give you less flexibility in terms of family being able to stay, or storage space. 
  • 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.
  • 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 to purchasing a standard property. You can find more information in our article Key things to consider about different retirement living options.

Ask the experts

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

1Australian Housing and Urban Research Institute, The University of Sydney (2019): Moving, downsizing and housing equity consumption choices of older Australians.
2Australian Housing and Urban Research Institute, The University of Sydney (2020): The Downsizing Patterns and Preferences of Australians Over 55.
3Australian Taxation Office: Downsizing contributions into superannuation.

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