Thinking about selling your home and downsizing?
Many seniors dream about financing a chunk of their retirement by selling their current home, buying a smaller place and investing the difference for income.
However, more often than not, they tend to gain less profit than they hoped.
Nu Wealth Managing Director Daniel McQuillan said when done right, downsizing could be a good idea, but advised seniors to think carefully about where they wanted to downsize before making the final decision.
“For many seniors downsizing is a popular way to improve their cash savings by selling their existing larger home and buying a smaller less expensive property,” he said.
“But downsizing is something seniors should give careful consideration to, as for most their personal wealth is tied up in their owner-occupier home.
“Many seniors like to downsize to the same location as their existing home because they are familiar with the area and usually have a network of friends and family close by.
“I would suggest contacting local real estate agents in their area to see if there are any suitable smaller homes that might become available during the time frame they are planning to sell.
“If you are considering moving outside of your local area to downsize, then you will need to carefully study the location of your new home to avoid losing money over the long term.”
When preparing for your future, Mr McQuillan suggested studying the real estate market and getting professional and informative advice on property.
“For most people their life savings are tied up in their home and those savings offer the greatest opportunity to create further wealth,” he said.
“Seniors should consider options like taking advantage of zoning opportunities and maximising the selling price of their property.
“Many seniors live in well-established homes on large lots that are perfect for developers who will pay a premium price if the home is in a good location.
“Another option to consider is redeveloping your block and retaining one of the new smaller homes in the development for yourselves.”
With property values increasing across Perth, reverse mortgage loans have become popular amongst seniors, but Mr McQuillan recommended taking future interest rate movements into account when considering this option.
“Reverse mortgages allow seniors to convert the equity in their property into cash for any worthwhile purposes,” he said.
“While generally no income is required to qualify, credit providers are required by the law to lend money responsibly, so not everyone will be able to get this type of loan.
“Seniors can withdraw money from a reverse mortgage loan on their home using the equity they have accumulated and stay in the property without having to sell.
“Although interest is charged as with any other loans, a senior does not have to make repayments while they live in the house – the interest compounds over time and is added to your loan balance.
“Seniors should take future interest rate movements into account.
“Currently interest rates are low and the level of compound interest is therefore manageable.
“However, if interest rates rise strongly over the coming years and house prices plateau, then seniors may find that the higher amounts of compound interest will eat much faster into their home equity than they planned, placing them in a financially vulnerable position.”