the real cost of downsizing

Downsizing is the term used when older Australians sell a family home and relocate to a smaller, low maintenance residence. This often involves the move from a house to an apartment or unit, or to a residential village. It’s also a term used in ‘Downsizing contributions’ when, under certain conditions, funds made from the sale of a more expensive property can be moved into super without many of the normal restrictions applying.

It’s easy to believe that downsizing is the ‘new black’ – a trend that’s taking over for retirees. But that’s not quite the case. In fact recent research tells a very different story. According to Professors Phelps, Ong Viforj and Clark, a hefty 86% of older Australians already live exactly where they wish to stay. Specifically, 67% strongly prefer to stay in their current neighbourhood and 19% have a moderate preference to do so. This is not quite the rush to ‘up stakes’ and move that the media portrays.

That’s probably because moving home is one of the highest ranking items on the list of stressful life occurrences. It’s also no doubt due to the complex mix of emotional, financial and logistical challenges associated with selling up and buying something smaller.

The following is a brief list of the major pros and cons which older Australians confront when they are considering downsizing. It’s entirely personal how important each factor might be in your life, but they are all worth thinking about.

Good reasons to move:

More funds – Downsizing can release home equity and allow you to reduce or pay off your mortgage, put more money into super or spend on long awaited travel or other lifestyle wishes.

Reduced maintenance needs – A smaller home can be much easier and cheaper to maintain.

Age appropriate accommodation – This may involve moving closer to amenities or family or buying a residence will remain accessible as you age.

Reduced outgoings – this might include lower energy, water and insurance costs

Why you may wish to stay where you are:

Emotional reasons – Many older Australians have raised families in their homes. Others may simply have created years of good memories. This can make it hard to sell. It’s not a measurable reason, but one that proves the strongest when deciding.

Less space – Maybe you simply enjoy the luxury of a study or dining room or larger garden. Units and apartments don’t suit everyone. Nor is everyone suited to dealing with residents’ committees or body corporates. You may also enjoy having guests to stay, entertaining or extra room for four-legged friends. 

Changing neighbourhoods – If you are deeply attached to your local doctor, pharmacist, hairdresser and fruit and veg shop, then the idea of a new neighbourhood can seem like hard work.

Costs – as we outline below, the cost of downsizing can take a large chunk out of your expected profits. It’s important to understand all the ‘hidden’ costs before you decide to sell.

Downsizing contributions

We’ve previously covered the way you can use profits from the sale of your primary residence to top up your super. There are quite a few conditions attached to this strategy and it’s important to scope the potential costs as well as the effect that extra funds may have on other retirement income streams, particularly the Age Pension. Remember, you will be moving money from an exempt asset (your home) to a potentially non-exempt asset, where income will be deemed. There are limits on how long funds can be held before Centrelink deems this money as income-earning, so it’s important to acquaint yourself with these rules.

Make sure you get the sums right

Separately, it’s often the case that we get excited when a neighbour or friend sells for what sounds like an impressive amount, and they repurchase a property for much less. Most of us will do the ‘simple sum’ of sale price of old house less purchase price of new house and think that’s the profit we too might make. 

Wrong! There is a long list of costs involved in downsizing and these could possibly reduce your expected profit by as much as 12-15%. The table below shares some indicative costs for the purchase of a two-bedroom home in in the Victorian town of Ballarat.

Purchase price of smaller home$950,000
Stamp duty (on property) now called land transfer duty in vic$52070  
Conveyancing expenses$2000
Utilities connection$120
Internet/phone connection$250
Other (security, dog proofing etc)$1100
House insurance$2500
Contents insurance$900
‘make good’ repairs$1500
Moving insurance$950
Total$65740 or additional 7% of purchase price

It’s sobering how a home that costs under $1 million can suddenly cost $65,740 more when the actual costs of this sale are projected.

The costs of selling the existing property (real estate agent, auction costs etc) have not been included, but would need to be to gain a better understanding of the net profit from your previous home.

There are no right or wrong answers when retirees think about downsizing, just answers that are most appropriate to your age, stage, health, hobbies and activities and support needs. The main thing is to think through all the upsides and downsides first. And to make sure, if you are a couple, that both of you are happy with the decision.

Seeking advice on the implications of a property sale on your retirement income makes a lot of sense. Why not book an Understanding the impacts of your home consultation to check how well this might work for you? You can also see how the proceeds from selling your home can impact your entitlements in a Maximising your entitlements consultation.

You can also check the likely government fees on a property sale in your own postcode by using this handy calculator.

How do you feel about downsizing?

Are you excited at the idea of a smaller, newer abode?
Or are you a ‘carry me out in a box’ type?