A big decision as we get older is whether to downsize the family home. Typically people downsize when they no longer need the larger space, or are not willing to deal with the financial and physical maintenance required of a bigger home.
Financial experts suggest that the large tax-exempt equity on the sale of their former residence can considerably boost a couple’s retirement nest egg.
Related: Should you sell the family home?
It might, but it doesn’t always work that way.
It depends. If you move from:
- A huge “McMansion” to a smaller condo.
- A large, expensive city to a smaller town – say, Vancouver to Moncton.
- A major city to a less expensive region.
- Canada to become an expat in a less costly area such as Portugal or Belize.
- Your family home and rent a new home instead of buying.
The media often features homes in the high hundred thousands to low million dollar ranges that boomers supposedly own. Obviously there are some people in this bracket, but the people I know live in more modest homes in the $300,000 – $500,000 range.
There’s not much of a nest egg left after all expenses are paid.
In my opinion, the most likely scenarios for people considering downsizing are either:
- Making a lateral move, or
- Paying off debt.
There may be little difference between your sale price and new purchase price. Sometimes, the new home will cost you more than the one you sold. Extra luxury can compensate for less space.
This was definitely the case for us. We viewed many types of properties and briefly considered some older houses that were less expensive but would need extensive renovations to modernize.
Related: Do home renovations pay off?
We had sold our 35 year-old fixer-upper – and, knowing us – we were not prepared to take the time and extra expense to renovate. We instead purchased a slightly more expensive 5 year-old property that already has nice upgrades and there is very little I would change.
Paying off debt
People who consider retiring while still carrying a mortgage on their property – or other large debt – can wipe it out with the sales proceeds and live in a smaller home, debt-free. Obviously this will free up cash for monthly expenses and, perhaps, a more luxurious lifestyle.
Set realistic expectations
We originally didn’t think we could afford to move until we called a realtor to do an evaluation of our home – as is. We were pleasantly surprised at her suggested listing price and then we did our calculations. Once we made our decision, events happened very quickly and costs rose just as fast.
The difference between the sale and our new purchase was approximately $100,000. From this amount came the following (rounded off) expenses:
|Real Estate commission||$18,000|
|Land transfer tax (percentage of price in BC, rather than fixed $375 in AB)||$4,000|
|Trip to Kelowna to view properties – flight, hotel, meals, car rental||$2,500|
|“Junk” removal for items we couldn’t sell or take with us||$1,000|
|New “small scale” furniture to fit into our “small scale” apartment||$5,000 – $10,000|
|Misc. expenses: packing supplies, interest on bridge financing, meals out||$1,000|
|Line of credit paid in full||$30,000|
So, we’re left with a little under $30,000. Not bad, but it will be used as more of a cushion than a nest egg.
Many people make a mistake thinking they can sell their home and move into a cute little condo or sea-side cottage with extra hundreds of thousands of dollars to fund their retirement. It’s possible, but make sure you have realistic expectations and determine how much you will actually net from the sale.
Related: How much house can I afford?
Moving to a smaller, cheaper place can free up home equity for living expenses and reduce annual housing costs. But, often a new place can cost more than the one sold.
You may save on utilities but pay costly condo fees. A small town may make you feel isolated from family and friends. It may not have the amenities you need. You might not want to drive 30 minutes to get a litre of milk, or travel to the nearest town to see a doctor.
Whether you will realize a large net gain, reduce your monthly living expenses, or have a more desirable lifestyle, downsizing is a big decision that takes a lot of consideration.
Make sure you make the right move.