A recent survey found that almost half of homeowners looking to sell are doing so because they want to downsize.
Downsizing involves selling your existing home and using part of those proceeds to buy a smaller, cheaper property and banking the surplus, or using it to supplement your income.
Although downsizing is most commonly associated with people approaching retirement, it is an option that can be considered by homeowners at any time. Typically, it is favoured by empty-nesters who no longer require a multi-bedroom family home and find themselves asset rich, but cash poor.
Is downsizing right for you?
Like anything else, there are pros and cons to consider.
Moving to a smaller home will usually result in lower living costs, such as power, maintenance, rates and mortgage payments, while freeing up cash for day-to-day expenses.
If the housing market has experienced substantial value appreciation over the years, the resulting sales gain can be considerable and fund future income or other investments.
On the other hand, by buying a cheaper property you risk relinquishing future capital gains, which will normally be greater on the higher valued home. This is particularly concerning for younger downsizers.
Another issue facing downsizers is competition from other buyers. The demand for five-bedroom, family homes in expensive, leafy suburbs might actually be considerably less than the market for single-level, low maintenance, townhouses, appealing to retiring baby-boomers, first-time buyers and new immigrants alike. That means that you may end up selling your family home for less than its true value and paying comparatively more than you should for your new, smaller home.
What are the alternatives?
One alternative would be to sell and rent, rather than to buy a smaller home. This would result in the maximum lump sum realised from the house sale and there are no future home costs and maintenance expenses. However, rents tend to rise and, perhaps most importantly, renters always face the insecurity of being asked to move out by the landlord. This uncertainty does not normally appeal to older people.
Things to consider
Bear in mind some other practical issues facing downsizers:
– You will incur a fee, usually about 3% + GST on the sale of your family home if you use a real estate agent, as well as legal, moving and marketing costs.
Furniture and belongings
– The new, smaller home won’t accommodate all of your existing belongings; you are going to have to store or throw many things away.
Friends and family – In order to maximise your gain you may choose to move to a less expensive area. That may mean seeing less of people close to you or having to make new friends.
Investing a potential surplus
– The cash surplus will need to be invested and you will have to decide how. In these days of comparatively low interest rates it may not show as high an eventual return as leaving it as equity in your property.
For more advice on buying by Stephen Hart of Hometopia and Auckland Homefinders, go to BNZ Good Home.