The Lowdown on Downsizing

The kids have flown the nest, and you no longer need a large high maintenance property – maybe it’s time to downscale? For some, this could be a tough choice to make, especially if they have lived in the home for many years and seen their kids grow up there. However, others may well look forward to a more relaxed lifestyle, unfettered by monthly bond repayments and the never-ending upkeep and maintenance that is part and parcel of owning a large freehold property.

Either way, when it comes to downsizing, there are a few aspects to consider.

The pros

There are numerous lifestyle benefits to downsizing from a large, free standing property to a smaller one. For one, you are no longer responsible for the upkeep and maintenance of a home, a large garden, a pool and other property features you may no longer use. You can also enjoy increased security a home within a secure development provides. Also, downsizing can result in significant monthly cost savings on rates and taxes, utility bills, maintenance and repair costs. Not to mention security and insurance costs. 

Run the numbers

The biggest expense in most households is the monthly bond repayment, and whether you will be free from this responsibility will depend on how well the family’s finances have been managed. If you have paid off your bond or at least the bulk thereof, it might be possible to sell the property, settle the outstanding bond and have enough capital to purchase a smaller property without having to enter into a new loan agreement.

On the other hand, if not enough equity has been built up, things could be slightly more tricky, especially if you are retiring. At age 65 and older, it is not easy to get a bond. In this situation, you will need to carefully consider what monthly rental or bond repayment you can afford on your lower pension income. Bearing in mind, it will also need to cover the costs involved in buying a new property, such a deposit, transfer costs and taxes.

Capital Gains Tax (CGT)

If you have lived in the home for some time and sold for a profit that exceeds R2 million, you will be liable to pay Capital Gains Tax. If the profit does not exceed R2 million and the home is your primary residence, then you will not have to worry about CGT.

Time is key

If it is not the best time to sell, consider delaying the decision to downscale by a few months as it could result in a better selling price depending on market conditions.  On the other hand, despite the current market conditions, units in secure complexes and retirement villages remain high in demand, and delaying the downsizing decision could mean missing out on a good buying opportunity.

What about letting it out?  

If the bond is paid off or there is a very small monthly repayment, perhaps consider renting out the property, rather than selling. Provided of course that the rental income exceeds the bond repayment and other costs. This option will require you to have enough cash flow to cover any vacancies. Letting out the property could be a great way to supplement your income.

Provided all aspects are considered carefully, downsizing can form part of a comprehensive plan that leads to a simpler lifestyle that offers financial freedom. 

TEAMGavin will be able to give excellent advice on the first steps.