Those opting for a variable rate could expect an average discount of between 0.50% and 1% off their lender’s standard variable rate. Those who choose to go fixed could expect a discount of between 0.15% and 0.25% off their lender’s standard fixed rate. Finally, borrowers who want a line of credit facility can expect a discount of around 0.6% off their lender’s standard line of credit rates.
It is best to seek expert advice and weigh up the benefits versus the annual fee to make sure your propack works well for you. The team at Your Mortgage knows from experience that some banks are willing, in some circumstances, to give higher rate discounts even on a lower loan amount in addition to waiving the annual fee, so make sure that you negotiate well with your lender. If they can’t give you a higher discount on the interest rate, at least negotiate to have the annual fee waived.
If you do not want to take a high LVR home loan when upgrading, you might want to consider liquidating any other assets you might have.
This might include your investments in the share market or even that second car that you bought two years ago, but isn’t being used enough to justify the extra costs such as insurance, registration and car service.
If you’re still over your limit for the type of home you want, it is time to consider looking further out of your preferred area in order to afford that home you want.
Often being one or two suburbs away from your key area can make a huge difference in price. You might be sacrificing on your location, but you will find that you are close enough to the major resources, amenities and lifestyle factors of your top choice anyway.
Let’s be honest, there’s no point maintaining a large home on an 800m2 block of land at the age of 60, just in case the extended family need a place to crash when they come to visit.
When you are at this stage of your life, it can be a sensible idea to downsize and offload some of the unnecessary baggage that comes with a family home. Those who take on the life change also appreciate the cost benefits of their decision. Moving to a smaller home can significantly reduce your electricity bills, water bills, council rates and time spent on maintenance.
Unfortunately, when discussing downsizing, we’re not only talking about those preparing for retirement. Some homeowners may be forced to downsize due to financial pressures where they are unable to keep up with the increased cost of living. Those who have overcommitted themselves in order to buy their dream home may start feeling the pinch as interest rates keep on rising.
Other reasons for downsizing
- being close to retirement and being asset rich but cash poor
- want to move to a better location and will compromise on size
- health restrictions call for easier living conditions
- the Baby Boomer generation (aged 45–60) is keen to travel
- you want to add more to your retirement fund
- you’re having your first child and wish to keep finances down early on
- a marriage break-up restricts funds
- the death of a partner
Prevention is better than cure, and Gillespie says you should always contact your lender as soon as you’re feeling any financial stress, and an alternative to selling may be devised.
Considerations when downsizing
Any change as great as downsizing is going to have an impact on your livelihood. When you’re economising on your property, the common reaction is that you will have more money and time to enjoy life, move closer to family and spend time with your friends.
If you’re retiring, you might choose to move out of your local area. Harvey says that some of the hot spots for retirees downsizing are the smaller areas up and down the coasts outside of capital cities. He mentions examples such as Hervey Bay and the Sunshine Coast in Queensland, as well as Batemans Bay, Port Macquarie and the Hinterland area in NSW.
These sea-changes are all tempting offers for retirees, but what often doesn’t come into play is the comfort zone that you’re leaving behind.
If you previously lived close to the city or family and friends, your social networks are at risk of being severed by the distance.
“I have seen this happen a lot. Downsizers spot a beautiful retirement village up the coast and they think their friends and kids will visit. Of course, they don’t visit often enough, so they usually end up migrating back to where their social networks are,” explains Harvey.
“The other thing they don’t factor in for their age and stage in life is the distance to medical facilities, entertainment, shops and transport.”
Of course, if you are a young family struggling with your mortgage, downsizing might also mean reconsidering the area you can afford to live in. This can be a hard step to take as your proximity to amenities and family can be just as important as for those retiring.
2. Type of property
Whether you choose to downsize or financial stress requires you to do so, it is important to consider what you want now and into the future. This will help ease the transition into a smaller property.
Retirees must be mindful of the access to their new home and how much maintenance they will be taking on. Remember, the reason you left the bigger home was to reduce the physical stress, not take it with you.
Understand that if you are moving from a large home to a unit complex with other residents nearby, you might require some time to adjust to the increased levels of noise and diminished living quarters.
On top of this, there are the many years of possessions that you will need to cull (or pay to store) so that you fit comfortably into your new space. If you are a retiree, ensure your property:
- is easy to navigate through
- has limited common walls and is in a smaller block
- is close to shops and amenities such as medical facilities
- is within easy walking distance to transport
If you are downsizing to reduce financial stress, begin by searching for a property in your existing area, although you will most likely have to reconsider your current location. Of course, re-assessing your property budget will have counter effects on your life.
“A lot of people don’t take into account that you’re likely to be changing neighbourhoods. So are you still going to be close to the kids’ schools, or that cheap supermarket that you go to? Is there going to be an increased cost of fuel? If you haven’t accounted for all of these things, it could make the property change not worthwhile in the end,” Lomas explains.
3. Costs of downsizing
While downsizing can free up more money for your everyday expenses, moving to a unit or a strata complex may end up taking some of this financial freedom away again.
In fact, your strata fees for a simple unit block of around 12, with no lift and no added extras can cost around $400 a quarter. This is $400 you do not have to pay when living in a separate dwelling.
The process of selling your home and buying into a new property can cost up to 11% of the purchase price and if you’re not making much from your sale, the additional $400 a quarter – or $130 a month – can be crippling.
If you’ve got your eye set on an over-55s development or retirement home, these fees could escalate even further.
One of the great positives about downsizing is that the sale proceeds of your existing home are often enough to buy into your new property and pay out your remaining mortgage.
If you’re a Baby Boomer, you’ve probably been working towards this goal for 20 years and the new financial freedom will be a glorious feeling.
Ensure you speak with your lender prior to settlement and enquire about how much it will cost to pay out your mortgage. If your mortgage is within the first five years of its term you may be required to pay thousands of dollars worth of discharge fees, exit fees, or deferred establishment fees (DEFs).
For younger families who are downsizing due to mortgage stress, a sizable mortgage will remain, but the move will bring instant relief from their monthly repayments.
In any situation, if you do require a mortgage on your new property you have several options available to make sure you get the best arrangement for you.
Getting a smaller mortgage
Like an upgrader, you can choose between using your portability feature and remaining with your existing home loan or you can refinance for a different loan arrangement.
Home loans for under $50,000 may be set at slightly higher rates to balance the margin of profit for lenders, but overall should be cheaper than taking out a personal loan. If you’re using your portability feature, your interest rates and terms of your loan should remain the same as before.
“You can often negotiate a better deal with your lender, as well, if you’ve got a good relationship with them and if you’ve been a good customer. You may be able to stay on the same rate or even get a better deal using another product,” Montgomery explains.
Montgomery says that if you’re comfortable with your lender and your research of products in the mortgage market suggests that their rates and terms are competitive, then there isn’t any reason to leave your lender and incur refinancing costs.
“The familiarity issue is a bonus there, but you’ll probably find that once you start to do your checking of the mortgage market, the grass is greener somewhere else,” Montgomery says.
The application process and loan term for small home loans is likely to be the same as for regular loans. To incur as little interest as possible pay off as much of the loan as quickly as possible. To apply for a new refinanced home loan you will still need to be working and prove your ability to be able to service the debt, however small.
Home loans for the retired
If you happen to be retired and require a home loan for the purchase of a more expensive property (such as an apartment in a retirement village), but can’t make the repayments, you can always consider taking out a reverse mortgage.
Reverse mortgages are only offered by specific lenders and are restricted at a maximum borrowing capacity of 25% of the value of the property being purchased.
Borrowers are not required to make any repayments on the mortgage until the property is sold or the last borrower on the loan contract has passed away.
When the property is sold, the lender will take the amount of the original home loan plus the interest accumulated over the period of time held by the borrower/s, with any extra proceeds to be given to the estate. Loan terms for a reverse mortgage range from five years to around 20 years and most borrowers need to be aged over 60 years to be eligible.
A reverse mortgage impacts more than just the borrower because it means that the lender has a stake in the property, whether it increases or decreases in value. This can be difficult to understand for the children of parents who have taken out a reverse mortgage, especially if the value of the property falls.
This will impact on the remaining percentage of the asset left to any beneficiaries and should therefore be discussed with all family members.
It is worth consulting your financial advisor on all decisions regarding the financial transition between properties.
“You may think your approach to downsizing and upgrading is a good decision but it might not always be. It is always good to get a second opinion – you don’t always have to use it – but when you’ve got proceeds from a sale such as when downsizing, it is a good idea to get some ideas about what to do with it,” says Montgomery.
Strategies for surplus cash
If you’re downsizing and you’ve got a large sum of money left over after paying out your mortgage and purchasing a smaller dwelling, it is advised that you have a plan for your additional money.
There are endless possibilities for making your surplus cash work for you, and ease you into retirement. Good financial advice is key to a happy retirement says Lomas.
“The choice of where you put your money will depend on the length of time before your retirement (as you will need the money then), how much money you’ve got, and your view on risk. My advice is to talk to a financial advisor before you do anything, because what you do with your money will require an in-depth look at your financial circumstances and will need to match your personal needs for the future,” Lomas explains.
Strategy 1: Deposit the money into a high interest yielding account
This is the less risky of investment options for your surplus cash. If you’re averse to risk and want to be exactly sure of how much you’ll have left to fund your retirement, this may be the option for you.
Strategy 2: Re-invest in property
If you are re-investing in property, now is a good time to snag a bargain in the current buyer’s market. If your purchase were to require a small mortgage, keep in mind your potential to repay this before retirement or develop a strict budget if the loan runs into retirement. Investing in the property market has risks, but in the current climate is less volatile than the share market. If you’re becoming an investor, tax issues and extra responsibilities will apply and financial advice is recommended from an accountant and financial advisor before going ahead with any property purchase.
Strategy 3: Invest in your superannuation fund
According to the Australian Taxation Office, an individual may make undeducted contributions (now called “non-concessional contributions”), ie, contributions from after-tax monies, to their self-managed super fund of up to $150,000. Alternatively, the individual may opt for the “bring forward option”, which will allow them to contribute three times the cap in one lump sum upfront. In other words, an individual may contribute up to $450,000 of non-concessional contributions in the year ending 30 June 2010. In which case, they will not be able to make more non-concessional contributions until 1 July 2012.
If in doubt, speak to your accountant or superannuation advisor. Despite the government’s continual effort to simplify superannuation, the rules are still reasonably complex.
Strategy 4: Shares/other investments
Investing in the share market is by far the most risky place to deposit your money in the current economic climate. Unpredictable conditions have already proved their damage capabilities on those with their money invested in shares across the globe. The decision to invest in the share market should not be taken lightly and it is advised that a financial advisor and risk management specialist be consulted before going ahead with any decisions in this area.
Strategy 5: Invest in fixed interest government bonds
Lomas says the safe option is to invest your money in fixed interest government bonds that are currently yielding good returns in the range of 8–9%. According to the Australian Securities and Investments Commission (ASIC), financial tips and safety checks website at www.fido.asic.gov.au, fixed interest government bonds are “offered by governments on advertised terms and conditions” where “payment of interest and of capital at maturity are government guaranteed”. ASIC says, “Australian government bonds are highly secure, and returns tend to set a benchmark for the market.”
How to reduce your costs
A new stamp duty concession has been released for pensioners living in the ACT who are downsizing their homes, in the hope of reducing the cost involved in selling your home and buying a new one.
From 1 July 2008 pensioners have been eligible for the concession under The Pensioner Duty Concession Scheme. Jon Stanhope, chief minister with the ACT Government says the scheme stipulates that pensioners are only subject to stamp duty of $20 if the purchase of their new property is a smaller home and does not exceed the median house price of $412,000.
“The Pensioner Duty Concession Scheme is aimed at encouraging pensioners to downsize their large houses to more appropriate smaller homes, such as a townhouse. This will help free up larger homes for younger families, while easing the burden of looking after a larger home for elderly Canberrans who live alone,” Stanhope explains.
There are also concessions available on the stamp duty paid on vacant land. For more information about eligibility visit www.revenue.act.gov.au/home_buyer_assistance/pensioner_duty_concession.