As you get closer to your intended retirement date, you may well start thinking about moving to a smaller, less expensive property.
On the face of it, downsizing in Australia can be highly advantageous. However, it’s not necessarily a straightforward decision. Alongside the benefits, there may also a few potential drawbacks to consider.
Read about some of the pros and cons of downsizing and how you can approach the decision with confidence.
Downsizing has some great advantages
Research by the Australian Housing and Urban Research Institute found that, among Australians who had moved since turning 50, more than half had downsized.
There’s no doubt that selling your property and moving to a smaller one has some clear advantages.
These include:
- You could end up with a valuable lump sum of capital
One of the biggest attractions of downsizing is the financial upside. Selling one property and buying a cheaper one may release capital that you can put to various uses. These could include clearing debt, investing, or giving your retirement fund a big boost.
- You may be able to reduce your regular outgoings
A smaller property will usually be easier to maintain. It is also likely to mean lower utility bills, insurance costs, and maintenance expenses.
All this could have a beneficial effect on your outgoings in retirement and free up money for other uses.
- You could enjoy beneficial lifestyle changes
As well as reducing costs, a smaller property can help improve your lifestyle.
It is likely to free up time previously spent cleaning, gardening, and on maintenance, giving you more time for leisure activities and enjoyment in retirement.
It also gives you the opportunity to move somewhere more convenient for your needs. For example, you could move nearer key amenities like shops, transport links, and medical facilities.
- A smaller property could be more appropriate for your physical needs
A common reason for downsizing is that moving to a bungalow or ground-floor apartment can make day-to-day living easier as mobility needs change over time.
Downsizer contributions can give your retirement funds a real boost
One benefit of downsizing that could influence your decision-making is the scheme introduced by the Australian government in 2018, known as the downsizer contribution scheme.
If you’re selling your main residential property, you can each contribute up to AUD $300,000 from the proceeds of the sale into your super funds as a non-concessional contribution that does not count towards your contribution cap.
To be eligible, you’ll need to be at least 55 years old at the time of sale, and have owned and lived in the property at some point, making it your primary residence.
Because downsizer contributions can have wider financial planning implications, it’s a good idea to seek expert advice before proceeding.
When downsizing may not be right for you
While there are clearly some key benefits to downsizing it’s important to think about the potential challenges too.
- The financial advantages may not be as large as expected
It may be tempting to consider the amount you’ll raise through downsizing as the “cost of property one minus the cost of property two”.
However, it’s important to bear in mind that, once various expenses and charges have been taken into account, your final profit may well be substantially less than you had assumed.
Sale and purchase costs, Stamp Duty, any pre-sale maintenance on your current property, and moving costs all need to be factored into your calculations.
In addition, there will be the immediate costs of bringing your new property up to a condition you are happy with.
- You’ll need to adjust to having less living space
As the name suggests, downsizing will mean less living space. While this will be advantageous in terms of upkeep and maintenance costs, it also means that you’ll need to adapt to having less room in which to live.
It may also preclude long-stay visitors and could result in you having to declutter and get rid of many of your possessions.
- Suitable properties may be at a premium
You may be thinking of downsizing to a small property near the coast that’s close to all the key amenities. But you should bear in mind that plenty of other people may have the same thought.
As a result, you may have to pay a premium for the sort of new home you are looking for, which could further eat into the profit you had assumed you’d make.
- You may be leaving an area you have grown familiar with
Moving away from somewhere you may have lived for years can be emotional.
You’ll miss the familiarity of regular routines and the proximity of favourite local spots, or the sense of community.
It can also be hard to leave a property you know and love.
It’s important to plan ahead
As you may appreciate, the decision to downsize your property is not one to be taken lightly or without detailed planning.
It’s also worth considering other options that may go some way to meeting your financial needs, such as renting rather than buying, or raising capital through an equity release arrangement.
It can also help to involve your family in the conversation. They may be affected by your plans and in some circumstances, may even influence your decision. Because of this, it can help to involve them in your decision-making process.
Get expert advice
Downsizing should always be viewed in the context of your broader financial and lifestyle goals. Speaking with a financial adviser can help you understand how a move fits into your overall retirement strategy and whether it’s the right step for you.
If you want to discuss any of the issues you’ve read about in this article, please get in touch with us.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only, it does not take into account your personal objectives, financial situation, or needs.
Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.