The upside of downsizing

Once the kids have moved out and you’ve recovered – emotionally and financially – you might consider downsizing. For some, the sentimental aspect and the physical strain of moving is too big a hurdle. Financially, however, there can be many benefits.

Downsizing usually releases some equity which you can use to pay for retirement living expenses or even to buy that new car or dream holiday you never thought you could afford. It can provide you with money for in-home support allowing you to stay in your own home longer. While there are still the once-off costs involved in buying and selling (agent’s fees and commissions, legal costs, moving costs and stamp duty), once you’re done, going forward you’ll typically spend less on heating, cooling and maintenance.

If you’re at retirement age and the prospect of no longer having a regular income seems like a scary prospect, downsizing may provide you with enough equity to invest in something that could generate some income. Diversification is the key when investing at retirement age, since you can’t afford to lose everything at this stage of life. A strong portfolio of blue chip shares can provide good returns. If you want to re-invest in property, a unit often offers a better yield than a house and can provide a solid income stream. Borrowing after age 60 can be more difficult, depending on your work situation, but is still an option – your mortgage adviser can tell you how.

There are also a number of superannuation and tax rules you need to be aware of. The good news is that the government is currently looking at ways to remove the disincentives for downsizing in an effort to encourage the release of larger family homes onto the market.

The 2017 Budget announced an important change to super contributions for home owners over 65 years old. If you have lived in your own home for 10 years or more, you can now make a non-concessional (post-tax) contribution to your super account of up to $300,000 from the proceeds of the sale of your home.

This new rule, which is set to apply from 1 July 2018, means that downsizing couples could contribute up to $600,000 to their superannuation. It’s a real incentive to sell for older Australians who may have too much money tied up in their homes and not enough in super. There are a number of rules and regulations to be aware of, however, and it could affect your pension if you have one. As always, speak with your financial planner before you commit.