Older Australians downsizing their homes is spruiked hard as the answer to many of society’s problems – from how to fund aged care to the housing crisis – but the push ignores some of the hidden costs that can really eat into your sale price.
For many, selling their large family home once the children have moved out makes sense. There’s no longer a need for so many bedrooms and maintaining a large house becomes more difficult with age.
Selling your old house and buying a smaller (and cheaper) place will also net you a nice profit, potentially enough to turbocharge your retirement. Win-win, right?
Well, not always. For starters, there’s the emotional attachment. Not everyone wants to give up their family home. It may have been in the family for generations, you might be intending to leave it to your children, or you may just not want to leave.
But there are also many unexpected costs that pop up when selling your home, costs that can drastically reduce the final sale price of your home and potentially defeat the whole purpose of downsizing in the first place.
Preparing your home and agent fees
Some of the first big bills you’ll encounter when downsizing are costs incurred making your home presentable for market. You may be thinking your home is already presentable – but any real estate agent will tell you that paying to make your home look exactly the way the market currently wants it to can net you tens of thousands extra in the final sale price.
Budgets for staging are as varied as homes themselves, but for an average three-bedroom in a capital city, you can expect to spend anywhere from $3000-$10,000.
Speaking of real estate agents, unless you want to sell your house privately, you’ll need one of these as well.
Agents usually charge three types of fees:
Flat fee: A set fee paid after your home sells, not based on the sale price of your home.
Commission: Sales commission to the agent of between 1.5 per cent and 3.5 per cent of the sale price of your home.
Bonuses: Not always charged, but some high-end agents have bonus clauses in their offerings if the sale price reaches a certain benchmark. For example, the bonus may be 5 per cent of any amount achieved above $1 million. So, if they can sell it for $1.2 million, the agent would get an extra $10,000.
Inspection reports, conveyancing fees and taxes
You’ve sold your house and found the perfect new place. Before you can even put an offer in though, it would be prudent to get a building inspection done. But this will be another added cost.
Previous research has shown an average pre-purchase building inspection in Australia costs between $500 to $750 in regional areas and between$800 and $1200 in metropolitan areas.
Once your new dream home has passed the inspection and the seller has accepted your offer, there are conveyancing fees. These are unavoidable legal fees paid for the transfer of ownership of a property from one person to another.
There are a few different legal documents that need to be prepared to officially finalise a sale. These need to be completed by a licensed and accredited conveyancer or solicitor, who usually charge fees of between $800 and $2000.
Then there’s stamp duty. Also known as ‘land transfer duty’ this is a tax charged by your state or territory when parcels of land change hands. Different jurisdictions have different stamp duty tax structures, but you can expect to pay between $30,000 and $40,000 on the sale of a $700,000 house.
Moving costs
Once you’ve cleared the hurdles of selling your home and buying a new one. Then you’ve got to actually move. They say moving house is one of life’s most stressful events and even paying someone to do it for you doesn’t help!
Weekday prices for removalist services in a capital city range from approximately $130-$160 per hour, and $140-$200 per hour on a weekend and even more on a public holiday.
Losses to pension entitlements
One aspect of downsizing that often gets overlooked is the effect it can have your Age Pension entitlements.
Generally speaking, your primary place of residence (the home you live in) is exempt from the Age Pension income and assets test. Your new home will not count towards the asset limits, but the extra cash you made from the sale of your original home will be.
So, if you sell your home for $1 million, then buy a smaller unit for $500,000, then that extra $500,000 will now count as an asset and could take away your pension eligibility entirely.
Like any major financial decision, downsizing requires careful consideration and planning before taking the leap. It can be a great way to unlock equity in your home and get the retirement you want – but be aware that it can come with many hidden costs.
Would you ever consider downsizing? Where would you move to? Let us know in the comments section below.
Also read: How to be sure a downsizing decision leaves you happy, healthy and wealth(ier)
You don’t pay stamp duty on the sale. You pay in on the purchase. And there’s no mention of the option to put surplus funds into superannuation, which in some situations means it’s not counted as an asset, although it generally will be at some point in time, when you move your super out of accumulation phase.
At this point in time, I would not consider downsizing, but life changes. If my partner died or became incapacitated, I probably wouldn’t have a choice. I do think greedy state governments are disgusting charging horrendous levels of stamp duty when people downsize. The federal govt wants us to downsize. The state government just wants a fist full of dollars and is happy to stop us.
I agree with you that The government is greedy. I recently purchased burial lot for my mum and found out there is GST charged on the purchase. That makes me feel disgusting.
After selling our home of fifty years, we moved into a home in need of repairs. The asset exemption for $ from sale of our previous home, intended for repairing new home, was NOT granted. It only applies if you sell your home and do not have a “new” home to go to. Be careful people.
In addition, there is consideration of capital growth.
If you sell a former home of $1.0m growing at 4% per annum (that’s low), that would be $1.48m at the end of 10 years.
If you then buy an apartment for $700,000 growing 2% per annum, that would be $853K at the end of 10 years.
And no tax, and no reduction in age pension entitlements
As Lorraine said stamp duty is paid on the purchase of a property.
We are currently in the process of preparation for sale of our large home and 5 acres, after being here 10 years, and downsizing into town.
Being rural things move slowly and it is frustrating to wait weeks for work to be completed but it is just something we have to live with.
When we do sell, we will put $300K each as a downsizing contribution into our SMSF as there is no age limit on this contribution.
We have already begun looking for our future home and the type of home we desire does not come onto the market too often, so the timing of sale and purchase is proving difficult.
We Downsized last month.
Sold our home of 35 years and moved into a Retirement Village.
Emotions be damded, it’s only a pile of Bricks and Mortar which served its purpose.
Excess funds go straight into super via the downsizer rules.
Interest earned will cover the $9K fees annually in the village, no stamp duty payable and surrounded by a caring, friendly community of like-minded people.
Found our tribe.
You obviously didn’t move into a Living Choice Retirement Village/Apartment where the owners rip you off, raise the monthly levy by 10% for 3 years running and comment that “The residents aren’t dying quickly enough”. It’s a toxic environment.
I downsized last year and had a tiny house built and moved onto a plot of land I had subdivided from my main house property years ago. Five years ago I was diagnosed with a chronic illness, I am divorced and had been managing the bigger house alone, but the illness did not get better and I knew it was time to have less to look after. Tiny house living isn’t for everyone, I was fortunate to have enough space to add a big deck and also have a manageable garden and live in a subtropical climate so I can be outdoors a lot. I also had the help of family to get rid of/move my 37 years of ‘stuff’ accumulated in the family home. These were more important factors in my decision to downsize, and already my health is stabilising as I have less stress and things like maintenance and cleaning. So far I have no regrets.
Another big issue not mentioned is the difficulty of borrowing if you need to buy before selling. Banks seem to have a strong prejudice against lending to retirees, no matter what your financial situation. For many, it’s simply not feasible to sell first and then find something to buy. We wanted to find a suitable home and buy with a short-term loan while selling. Banks kept telling us the government won’t allow them to lend to ”pensioners”. When we protested that we were self-funded, the reply was ”Oh no, no, no. You can’t use your superannuation pension to buy property. That’s for living on!” Um! I thought a roof over your head was actually a living expense? And how stupid! If there is sufficient income and assets and a viable plan, why shouldn’t a retiree borrow? Especially to downsize?
Eventually, we did secure a short-term loan from Commonwealth Bank which other banks told us, in a very derogatory tone, will ”lend to anyone indiscriminately”. Not true. To begin with, they only lend to customers. And they were very diligent in assessing our circumstances and discussing our plans. What I did think weird was that they wouldn’t lend short-term. We had to take a 30-year loan, in our 70s!!! Paid it out without penalty 6 months later. But did they really think we were likely to stay in debt beyond age 100???
The government needs to do something about this silly notion that a retiree shouldn’t be allowed to take a short-term loan to downsize if they want to.
Suggest you might contact ASIC about CBA giving you a 30 year loan in your 70’s. Can’t see that been “responsible lending”
It is possible to obtain a Bridging Loan for up to 12 months from the date of settlement of your new property. It must be repaid.
We are currently considering this type of loan rather than divesting ourselves of our term deposits which are currently, finally, earning a reasonable amount of interest.
The conundrum is the interest of the Bridging Loan will be more than the interest on the term deposits and we wouldn’t want it to be in force for more than 3 months.