What is Downsizing?
Downsizing is typically the process of selling a much larger home and buying a smaller one, often a bungalow, condo, apartment, or townhome.
Apart from the fact that there is a considerable difference in the square footage of the two homes, there is typically a substantial difference between the selling price of the old home and the purchase price of the new one.
Why do people consider downsizing in Canada?
There are many different reasons why someone might consider downsizing, but on average, they tend to take two forms: practical and financial. Here are some of the more typical reasons for downsizing in Canada:
- To pay off their conventional mortgage and/or other debt
- To cut monthly bills (heat, hydro, municipal taxes, etc.)
- To reduce the amount of housework, yard work and/or maintenance required
- To move closer to loved ones
- The winter is spent away, therefore they don’t live in their home year-round and so don’t need such a big place
- They need extra cash to help fund their retirement
- Their home is too big for them
The negative effects of downsizing
Most of us don’t want to move – in fact, 93% of us hope to age in our family home. But some retirees think that downsizing is the only solution to their financial problems. If that is your key reason for downsizing, it’s important to be aware of all of the costs involved, as well as the alternatives.
The financial cost
While there are plenty of downsizing tips available, few of them discuss the expenses involved. This could be one reason why many retirees are unaware of the true costs of downsizing in Canada. The Ipsos survey discovered that 41% of homeowners don’t actually know how much it would cost to downsize. Furthermore, 39% of homeowners are skeptical that downsizing will actually save them any money.
This is not too surprising, considering 31% of those homeowners who did downsize found that the costs were more than they expected. Like these Canadians, you might not be aware of all of the expenses involved. To help you to understand how much downsizing could actually cost you, these are some of the typical, unexpected costs that many people are unaware of. [8]
Health Concerns
As you age, your health will become a determining factor in all decisions. If you (or your spouse) have mobility problems, a two-story home probably is not the best place to live. You can make accessibility accommodations, but the costs could be high.
On the other hand, if your current layout has fewer stairs or is all on one floor, widening a few doors for walkers isn’t that much compared to the costs of selling and moving. If you are younger and thinking about aging parents (or looking ahead to being one), you could consider a home makeover upgrade using what is called universal design standards—designed for people in all stages of life, including those with disabilities. This will allow you to stay in your home for as long as you would like without having to make modifications for your later years.
Serious health concerns may be a reason for moving to some form of senior housing, of course, but that’s not a downsizing issue.
The Middle Ground
If you are not sure what to do, there is some middle ground to explore. Instead of selling, you could rent your home and move into something smaller, using the rental proceeds and banking the extra money. “Selling your home outright can cause major disturbances in your financial strategy. Always consider the alternative of leasing your home to good renters who will pay a premium for your asset. This allows you to be flexible with your retirement lifestyle. Whether you choose to move into an apartment or travel the world, you now have a new form of income,” says Timothy W. Hooker, AIF, co-founder, investment manager, and chief compliance officer at Dynamic Wealth Solutions LLC in Southfield, Mich.
If you decide to rent your home, consider using a management company, particularly if you don’t have experience as a landlord. However, even with the additional expense of a management company, it may still be better than paying selling costs, and you can continue to cash in on the rising value of your home.
You could also rent out a room or portion of your home, but this should be done with care, particularly if you rent to somebody you don’t know. Research local ordinances concerning roommates, not just whether you can have one in your neighborhood, but what to do if you cannot evict one.
The Bottom Line
As a retiree, you hope to be able to make some choices about how you live that don’t center on money. If you love your home and all the memories it holds, you might decide to stay even when it does not make financial sense.
The decision is a personal one. Crunch the numbers. Calculate the upfront costs of moving, and compare them to the yearly savings you’ll realize. A small gain probably isn’t worth the trouble, but substantial savings might make selling the best option.
KEY TAKEAWAYS
- Downsizing to a smaller home in retirement must be done wisely.
- You need to accurately determine your current home’s worth by using several online resources or local real estate agents or hiring an independent appraiser.
- You need to be clear-eyed about the cost of real estate in the area to which you are moving by using the same resources.
- You should look carefully at the tax implications of a move. [9]