Downsizing means selling your old home and buying a smaller one. Maybe your kids have left home and you want to enjoy your retirement in a new location on a smaller scale. Maybe the effort required to maintain a four bedroom home is simply too much as you get older.
Downsizing your home can open up a totally new lifestyle and free up some extra cash as well. You have the opportunity to increase your cashflow in retirement, pay off your home loan debt and live a low-maintenance lifestyle. Downsizing can be tricky because you need to sell and buy (or buy and sell) and get the timing right in regards to your finances. But you have plenty of options.
Think about finance
You may find you can achieve your downsizing goals without a home loan. If you’ve built up sufficient equity in your family home, selling could potentially fund the purchase of your new property. If this is the case, you won’t have to worry about finance. But if you do need to source a home loan, your situation could get slightly trickier.
Banks are hesitant to lend to older borrowers, particularly those over 50. There are options, but you might have to do a bit more legwork than your last home loan.
Nearly all lenders will want you to provide an exit strategy demonstrating how you plan to pay off your home loan. It could be from the sale of an investment property or from drawing down on your superannuation. You might have shares or other assets you plan to sell. One way or another, you’ll have to document in writing how you intend to repay your debt.
Because finance can be trickier for over-50s, you should think twice about buying a new home before you’ve sold your old home. Signing a contract for a new home while the sale of your old one is pending is a risky gamble. You could find yourself facing trouble selling, or selling for far less than you’d anticipated.
In the event you do buy a new home before selling your current home, you may need to access what’s known as bridging finance or bridging loans. Bridging loans are short-term home loans that help cover periods of cash flow shortage. They’re designed as temporary solutions to temporary situations, and if all goes well you should be able to pay off a bridging loan quickly.
However, waiting to buy until you’ve sold your old home can save you the stress and uncertainty of having to source interim finance. If you have sufficient equity in your old home, odds are you can afford to be patient. That patience will pay off in the long run.
It’s difficult to determine the right time to downsize because it’s a very individual proposition. It all comes down to your own needs and financial goals. However, it’s still wise to keep an eye on the property market to ensure you’re giving yourself the best potential for capital gains.
If you’ve owned your family home for some time, it’s likely you’ve built up quite a bit of equity and seen some strong capital gains. If you have the luxury of patience, watching the market can ensure you actually realise those capital gains.
Take a look at recent auction results in your suburb to see whether you’re in an area that’s in high buyer demand. You’ll also want to pay attention to recent comparable sales to see what price other homes in the area have been fetching.
In monitoring the market, try to take a measured approach. Don’t sell in a panic if prices and auction clearance rates start to head south. Likewise, don’t sit on your hands trying to gamble on either the top or bottom of the market if you feel you can get a good price for your house now.
Cut through sentimentality
This might be the most difficult bit of advice to actually put into action. Selling the family home and downsizing is a monumental life event and there’s a lot of emotion involved. As much as you can, you’ll have to remain practical when making your decisions.
Decluttering can be the most emotional experience you face when downsizing. Buying a smaller home means you’ll have to divest yourself of many of the possessions you’ve spend your adult life accruing. Many of them will have sentimental value. To successfully downsize, you’ll have to ruthlessly prioritise which items to keep and which to get rid of.
Think about your future needs
It can be quite jarring to move from a large family home into a smaller property better suited to retirement. You can make the move a bit less jarring and keep yourself from buyer’s remorse if you put some thought into your likely future needs.
Are you likely to have family members moving back in with you in the future? Are you able to keep up with the maintenance required on your new property? Does the location of your new property meet your future social needs? Do you have easy access to amenities?
If you’re looking to downsize, you may well be moving into the property in which you’ll live for the rest of your life. It’s likely your needs and priorities will change in the years ahead. It’s worth putting some thought now into whether or not your new property will meet those needs.
Adam Smith was the home loans editor at Finder. Prior to joining Finder he was the editor at Australian Broker where he had been writing about home loans since 2010.
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It’s difficult to determine the right time to downsize because it’s a very individual proposition. It all comes down to your own needs and financial goals. However, it’s still wise to keep an eye on the property market to ensure you’re giving yourself the best potential for capital gains.