As much as you want to keep your beloved home with its 5-bedroom and huge garden, there may come a time that looking after it can be overwhelming. The house may be getting harder to maintain, some rooms are left unused, or the stairs are getting difficult to climb. In instances like this, downsizing or moving to a smaller home may benefit you.

Treat downsizing not as a “downgrade” from your large home to a smaller one, but as writing a new chapter to the book that is your life—and before you start, you have to make a draft, a blueprint you could use to ensure your move could go as smooth as possible.

Before downsizing your home, do your due diligence. It’s not as easy as buying the cheapest, smallest home you find. Here are ten things you need to know before downsizing your home:

  1. It involves a lot of planning. As with any home purchase or move, downsizing takes a whole lot of planning—it’s a huge life decision after all. You need to ask yourself why you want to downsize.

Are you downsizing because you’re retiring in the coming years? Do you want a smaller home because of a lifestyle change or a career move? These questions are just some of the many you need to ask yourself, which may help you set a budget.

Also consider where you want to move and the type of house you’d like. What home features are non-negotiable to you? What features can you live without? Again, these questions may help you set out a budget for your downsizing journey.

  1. There’s a downsizer contribution scheme. This government initiative allows Aussies to boost their superannuation using the portion of their home sale proceeds. Under the scheme, downsizers can put up to $300,000 from the sale to their super.

According to the Australian Taxation Office, the contribution will not count toward the cap, enabling downsizers to contribute even if their super balance is over $1.6m.

  1. You need to consider associated costs. Moving to a smaller house doesn’t mean it’s less expensive. Even if you make a profit from your current home’s sale, you still need to consider the costs you may incur by downsizing.

Some of the costs you need to take into account are:

  • Stamp duty
  • Legal fees
  • Moving costs
  • Inspection fees
  1. Consider if your home sale proceeds would be enough. Make sure you have thought about what would happen to you and your finances should you opt to downsize. Consult a professional such a financial adviser who could help you in your decision-making process.

Research about the market and how your current home’s value would fare. Consider having an appraisal done to have a rough estimate of the amount you may get if you sell your house. Then, ask yourself—would this amount be enough to sustain all costs of downsizing?

  1. It could be low maintenance. While moving to a smaller abode means less space and flexibility, it could prove to be low maintenance. It may take less time to maintain and clean your new house. Moreover, your utility bills could also cost less.
  2. A smaller home means less material things. Before you move into your downsized abode, you may be forced to declutter some of your material belongings. Smaller homes tend to have fewer spaces to store your valuable, so you have to get creative with your organisation.

Consider donating or selling things that you haven’t used in the last five years or materials that aren’t essential in your daily living. You may also digitise your photos and music to save more space. By donating things no longer in use to charities, you can pay it forward – or have a garage sale to generate some cash from things you don’t use or need anymore.

  1. The proceeds of your home sale are exempted to the asset test for up to 12 months. The asset test is one of the two tests used to determine eligibility for the Age Pension or government benefits.

When you sell your current home, the profit you get from it is exempted from the asset test for up to 12 months if you plan to use the money to purchase, construct, or renovate another home.

However, the proceeds from your home sale are “deemed” in the income test, according to Moneysmart. The income test examines your proceeds as income from financial assets, which may affect your government benefits.

For more information about Age pension and government benefits, visit this Moneysmart page.

  1. You may get emotional. Saying goodbye to your home can be hard for some. There have been numerous studies on how a physical space can be tied to a memory. A memory could be embedded with value more than money could offer. So, bidding farewell to your former home may make you cry, especially if it’s one that you build a lot of memories in.

To avoid getting overwhelmed by emotions when downsizing, think of it as a new chapter in your life. Instead of being sad that you’re moving to a smaller space, think of it as a decision that could enable you to have a better lifestyle that is easier to uphold. Think of your new house as another space to make great memories in.

  1. You may need to adjust to new surroundings. Since you have spent many years in your old home and neighbourhood, you known them like the back of your hand. You’re familiar with all their nooks and crannies. However, when you move to your new home in a different neighbourhood, you must learn all their ins and outs.

You have to familiarise yourself with the environment, the people, and the establishment. It may sound scary but look at it as an adventure—you’re exploring different things you’ve never seen nor done before!

  1. It’s not your only option. While downsizing has gained popularity over the years, with half of those over 55-years-olds open to the possibility of moving to a smaller home, it’s not the only option you have. You could explore alternatives such as retirement villages and other community living choices. These alternatives have emergency systems, security, and staff to cater to the residents’ needs.

If you would like to live a bit closer to your loved ones, consider a granny flat, which is a secondary dwelling on a property. It can be built to the main house or a separate structure. This type of dwelling could give you the benefit of a low-maintenance yet private home, with the bonus of being close to your loved ones. However, you need to check with your council to know about the regulations when building this type of structure. If you ever need to see the sharpest refinancing rates on the market click here: Compare Refinancing Home Loans

What to consider when downsizing

For many Australians heading into their sunset years, downsizing is something to be considered, especially if they are currently living in a house that is too big for their needs.

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.

What are the common reasons for downsizing?

When discussing downsizing, it is not only 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 include:

  • Being close to retirement and being asset rich but cash poor
  • Wanting to move to a better location and willing to compromise on size
  • Health restrictions call for easier living conditions
  • Plans of frequent travel
  • Adding more to your retirement fund
  • Marriage break-up restricting funds
  • Death of a partner

Considering the location and type of property

If you are retiring, you might choose to move out of your local area. Some of the hotspots for retirees downsizing are the smaller areas up and down the coasts outside of capital cities like Hervey Bay and the Sunshine Coast in Queensland, as well as Batemans Bay, Port Macquarie, and the Hinterland area in New South Wales.

These sea-changes are all tempting offers for retirees, but what often does not come into play is the comfort zone that you are leaving behind.

For instance, if you previously lived close to the city or family and friends, your social networks are at risk of being severed by the distance.

A typical scenario is this: Downsizers spot a beautiful retirement village up the coast and they think their friends and kids will visit. Of course, they do not visit often enough, so they usually end up migrating back to where their social networks are.

Another thing that is commonly not factored in by downsizing retirees 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.

Whether you choose to downsize or financial stress requires you to do so, it is also 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, reassessing your property budget will have counter effects on your life.

A lot of people do not take into account that they are likely to be changing neighbourhoods. Some of the questions you will need to ponder on are: 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 have not accounted for all these things, it could make the property change not worthwhile in the end.

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 detached 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 are not making much from your sale, the additional $400 a quarter – or $130 a month – can be crippling.

If you have got your eye set on an over-55s development or retirement home, these fees could escalate even further.

You will also have to think about stamp duties, which vary across each state.

Mortgage considerations

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 are a Baby Boomer, you have 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 are 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 have a good relationship with them and if you’ve been a good customer. You may be able to stay at the same rate or even get a better deal using another product.

If you are comfortable with your lender and your research of products in the mortgage market suggests that their rates and terms are competitive, then there is not any reason to leave your lender and incur refinancing costs.

The application process and loan term for small home loans are likely 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.

Reverse mortgages

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 cannot make the repayments, you can always consider taking out a reverse mortgage.

Reverse mortgages are only offered by specific lenders and are restricted to 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 borrowers, 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.

What to do with surplus cash

If you are downsizing and you have 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. 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 have, and your view on risk.

Here are some of the things you can do with your surplus cash:

Strategy 1: Deposit the money into a high-interest yielding account

This is the less risky investment option for your surplus cash. If you are risk averse 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

Investing in the property market has its risks, but can be 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.

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: Invest in shares

Investing in the share market is by far the riskiest 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

The safe option is to invest your money in fixed-interest government bonds. According to the Australian Securities and Investments Commission (ASIC), 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. Australian government bonds are highly secure, and returns tend to set a benchmark for the market.