Why Downsizing Might Not Be Your Best Option

Why Downsizing Might Not Be Your Best Option

As retirement approaches – or indeed even if you are already in retirement, the idea of downsizing is often seen as a natural choice for older Australians. A smaller home means less maintenance, a simpler lifestyle, and the chance to unlock some of the wealth tied up in your current property. But while it can be the right move for some, downsizing isn't always the best option. Here's why you should think twice before making that decision.

1. The True Cost of Downsizing

Many people downsize to free up money, but the costs involved in selling and buying can quickly eat into the funds you expect to gain. Real estate agent commissions, stamp duty on your new home, legal fees, and moving expenses could add up to as much as some 5% - 10% of the sale price. For a $1 million home, that’s $50,000 to $100,000 in costs!

2. Effects on Your Age Pension

If you rely on the Age Pension, the lump sum you receive from selling your home could affect your entitlements (unless you contribute some of the funds to super – which may require financial advice). Centrelink uses income and asset tests to calculate benefits, and if the proceeds from your home exceed certain thresholds, your pension might be reduced or even cut altogether.

Since many retirees depend on the Age Pension as a crucial part of their income, this loss could outweigh the financial benefits of downsizing.

3. Emotional and Social Costs

A home is more than bricks and mortar. It's where memories are made, and communities are built. Moving away from a place you've called home for decades can be emotionally draining. The process of packing, selling, and moving is stressful, and leaving behind familiar surroundings can lead to feelings of isolation.

Being farther from friends, family, and essential services like healthcare can also reduce your quality of life, which could offset any financial gains.

4. Missing Out on Future Property Growth

If the price of houses continues to go up, the house you're in now will appreciate more over time than a smaller, less expensive home. A $1 million home that appreciates by 5% annually will grow by more in dollar terms than a $800,000 home. By staying in a higher-value property, you stand to gain more capital growth over time.

Plus, once you’ve paid the costs of selling and buying, that money is gone forever. In a rising property market, you might find that selling your home today puts you in a worse financial position down the line.

5. Alternatives to Downsizing

If downsizing isn’t for you, there are other ways to unlock the equity in your home. A reverse mortgage is a home loan designed for people aged over 55 that allows you to access some of the value in your property while still living in it. This can help you cover living expenses, healthcare costs, or even assist family members, without the need to move.

Reverse mortgages offer a way to stay in your home and continue benefiting from property appreciation, all while accessing funds to improve your quality of life.

While downsizing has its benefits, it’s essential to weigh the financial, emotional, and social costs before making such a major decision. For many older Australians, alternatives like reverse mortgages may offer an alternative solution to accessing the value in their home without uprooting their lives. Always seek professional advice to explore all your options and make the best choice for your situation.