The pros and cons of downsizing

29 Mar 2018 By ME Bank

A change may be as good as a holiday, but if you’re thinking about downsizing your home it’s important to weigh up the pros and cons to be sure you’re making the right move.

Downsizing for seniors can offer plenty of pluses. Research by the Australian Housing and Urban Research Institute (AHURI) found among Australians who had moved since turning 50, one in two had downsized, motivated by the prospect of enjoying a low maintenance lifestyle yet still able to enjoy access to shops, cafes and medical facilities.

Monetary benefits for sea or tree changers

While the same study found financial gain tends to rank low on the list of priorities for downsizers, the decision to downsize your home can have monetary benefits – especially for those who choose to make a sea or tree change.

The Association of Superannuation Funds of Australia (ASFA) recently crunched the numbers to find that selling a Sydney home and downsizing to the more affordable retiree haven of Forster-Tuncurry on the New South Wales north coast could free up a whopping $650,000 in home equity.

It’s a similar picture in other states. A downsizing Melbourne couple could potentially free up $560,000 in home equity by making a tree change to the Echuca-Moama region.

Benefits don’t stack up for city dwellers

On the flipside, not all empty-nesters want to leave a familiar area, and downsizing your home within the same locale may not deliver as much of a windfall after allowing for transaction costs.

The median home value in Sydney, for example, is $895,000, meaning a downsizer could potentially face a stamp duty bill of almost $36,000.

Possible impact on age pension payments

When funds are freed up by downsizing, it can come at the cost of age pension entitlements. That’s because the family home is exempt from the pension assets test, but any home equity released by downsizing is not, and this can be a serious drawback for downsizers.

On the other hand, from 1 July 2018, home owners aged 65-plus can use the proceeds from downsizing to grow their super. Each member of a couple can make an after-tax super contribution of up to $300,000 this way, so downsizing could add an extra $600,000 to your super nest egg. However, this has the potential to see seniors become self-funded retirees because they lose out on age pension payments, making it critical that any decision to downsize stacks up from a finance and lifestyle perspective.

Lack of suitable properties can be a challenge

The AHURI study mentioned earlier found the majority of those who were downsizing for retirement found the process relatively easy. Nonetheless, one in four ran into problems, with the most common challenge being the lack of suitable properties.

Downsizers still want to live large, often preferring homes with two to three bedrooms, ample storage, good security and areas to entertain. If the ideal property isn’t available at the right price, the appeal of staying in a family home can see plans to downsize for retirement put on the backburner.

Media Super is always here to help

If you’re thinking of downsizing and want to talk through the impact on your retirement income, including the Age Pension, we can help. Call the Helpline on 1800 640 886 to get started.

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