Moving costs: The Downsizer’s Dilemma
Key Points
With rocketing property prices and government incentives, the decision to downsize is now an important part of the later life Australian conversation.
Taking the plunge and deciding to downsize means jostling against other downsizers to find the right property for you, paying away a good chunk of the benefit in costs and duties and possibly foregoing government entitlements.
Getting the chance to funnel more money into super is a worthy option, but how much will it really influence your decision?
A downsize move requires a solid understanding of all the implications and costs, as otherwise your outcome could be more of a debacle than a dream.
Meanwhile - a clear understanding of the situation and your options may give you the justification to stay right where you are.
Your situation is unique, and you should base your decision on a full understanding of the potential outcomes.
*Please note that Budget changes do not come into force until July 2022
Brendan Ryan CFP
0412 181 031
Background
The theme of the 2021 Budget for older Australians is about flexibility. This means the flexibility to channel money into superannuation, even if you are well on your way to your mid 70s.
A key feature of this renewed flexibility is an expanded window for downsizers to contribute to super when selling their home. This scheme is now open from age 60.
According to the treasurer in his speech, this flexibility has the additional benefit of freeing up more housing stock for younger families.
The downsizer contribution, as well as the other ways older Australians can put their savings into super, makes the idea of selling up and freeing up wealth more attractive.
At the same time, the Government run Home Equity Access Scheme is becoming a more important part of the offering for retired Australians - and this may sway you in your decision to stay put, or at least delay your decision to move.
This makes the decision to downsize a story that has quite a few moving parts - the downsizers should make sure they know the full story before putting their home on the market.
The Dream
The best downsizer outcomes I have seen are not motivated by government incentives.
A home simply too big or unsuitable may need to be sold.
In this case, real estate agent fees, conveyancing and marketing costs are the unavoidable costs of this change.
Being able to put surplus funds into super after a sale is a nice outcome, but not a driving force.
If the downsizer is already self-funded, there is no concern for the impact on age pension entitlements.
In these situations, the ability to contribute more funds to super is a bonus, not a key part of the decision making.
The Debacle
Running low on savings while living in a house that has skyrocketed in value means that making the most of this wealth to support day-to-day living costs is an option that now must be on the table.
With the government talking of the ability to contribute to super as a way of “freeing up housing stock for younger families”, you’d think that there was a clear and easy pathway for you to make the most out of the value of your home.
However, it’s not that simple.
Before looking at the obvious challenge of finding the right “downsized” property for you, at the right price, and at the right time (i.e hoping that the purchase settles without needing bridging finance), consider the following:
Agent selling costs in NSW are going to be between 1.5% - 3.5%, with additional costs for marketing ($1-$10k), conveyancing ($800-$2,000), and auction fees ($400-$1000).
Then you have transfer duty (once known as stamp duty) that runs between 3%-5% (higher for homes greater than $3m).
Finally, leftover funds are assessable for the Centrelink Assets test - and this is not impacted by the downsizer contribution (it is still assessable), meaning a couple could forgo nearly 38k per year in pension payments, as well as lose the age pension concessions, if the proceeds of a downsize were to push their assessable assets higher than government limits.
Consider an example of a Northern Beaches couple with Centrelink assessable assets of $200k, receiving the full age pension of $1,458 a fortnight (approx. $37.9k per year), who are looking to downsize from a median priced house of $2.05m to a median priced unit of $965k. (Price source: Domain).
The sale of their property is going to cost $41k (using a 2% real estate agent fee rate), as well as up to $10k in advertising and conveyancing costs.
The purchase price of a $965k unit is going to attract a transfer cost of $38,760 (using the Revenue NSW calculator).
Once settled in the new unit (even after all the associated costs), they will have too much in assets to qualify for the age pension - meaning they miss out on income of about $37.9k per year.
The result of a move from a median price house to a median price unit is nearly $90k in selling and transfer duty costs, and the loss of an age pension of $37.9k per year.
I am sure you will agree that this is a high cost indeed.
The Delay
Consider the median home value of $2.05m, and savings of $200k. If the home is still suitable - can the decision to move be delayed?
These are the things I think downsizers should consider:
How much is your day to day spending? How long can this be supported by your savings and the age pension? Studies forecast a comfortable living can be had for $62k per year - have you looked closely at how long your money can last?
Have you looked at the Home Equity Access Scheme (formerly the Pension Loan Scheme)? A 50% top-up to your age pension in the form of a loan against your home may make sense. You could boost income to $56.9k pa - meaning the shortfall to a “comfortable retirement” is more easily supported by your $200k in savings.
A look at the history of aged care policy shows a focus in the last 10 years on care in the home. Simply put, the government wants to deliver more care options to you in your home, not at a facility. While the of full time residential aged care should be a consideration of the your planning, you should also get an understanding of your care options at home should the need arise.
Note that the Home Equity Access Scheme - which is basically works like a top-up to your fortnightly age pension payments, will soon be able to be taken in larger chunks - meaning that you could draw down a year’s worth of loan in one hit. This could be very useful flexibility.
The interest rate is 3.95%, and like any reverse mortgage, the interest compounds over time.
In the case of the Northern Beaches median house price of $2.05m, the couple would be able to “top-up” their age pension of $1, 458.6 per fortnight, with up to $729.4 - making their fortnightly payment $2,187.00. This means an annual cashflow of $56,885.
Consider that the extra $729.40 a fortnight is a loan of $18.9k for that year. As a percentage value of the property, this represents less than 1% of the total value - which may comprise just a small amount of the expected growth in value. Put another way, if your property is going up in value by 5-10% a year (over the longer term), does it make sense to take less than 1% of that increase as fortnightly payments to help with your cost of living?
By drawing down a small proportion of the value of your property to help you with day to day costs, and understanding the scale of your debt, and how it fits in with your overall picture, you may end up funding your day to day living expenses and staying where you want to live. This may mean a drawdown later in life, or a drawdown in early retirement, allowing the timing of a move to be more suitable.
Meanwhile the increase in value of your current property over time could be substantially more than your Pension Loan drawdown, and increase the value of your estate more effectively than downsizing to a lower value property, paying costs and foregoing an age pension.
Make contact
As you can see, the downsizing story is complex and warrants a close look. It also requires good management over time.
This is something that a retirement expert can help with.
Please call me on 0412 181 031, or email me to discuss your situation.
Brendan Ryan
Certified Financial Planner
Not sure what your next move should be?
Why not start with a phone call? I look forward to talking with you soon.
I am always keen to hear people’s stories and find ways to help.
Brendan Ryan CFP
All of my clients have unique situations, but they want the same thing - to get good value and security from the big companies that help them manage their savings, to make sure they get all that they are entitled to from the government, so that they have confidence in their plans.
More than 25 years experience working in finance, together with a deep understanding of retirement and government puts me in a strong position to help you gain confidence that you are doing the right thing, and that you are well organised in your approach.
Call me on 0412 181 031 or send me an email.
Brendan Ryan CFP