My Financial Planning practice in Toronto. I’ve noticed that more families are selling their homes and moving to where homes are less expensive. They do it to strengthen their financial position.
High home prices, high debt and low savings rates are driving his trend. Selling a home and buying a less expensive home can unlock cash that to pay off debt and to invest for retirement.
You may be asking yourself if this is the right “move” for you. This article talks about some of the factors to consider in this important decision.
You can’t eat your home, or use it to pay the electricity bills.
On average, about 50% of Canadian’s wealth is in their home[1]. A Manulife Bank survey recently reported that 22% of families say that their home makes up over 80% of their wealth[2]. That is a lot of wealth tied up in real estate.
Debt is on the rise too. Mortgages represent $18.9 billion of household debt in Canada. It increased $1.2 billion in 2016[3]. Years of low interest rates, as well as rising home prices, have led Canadians to increase their debt.
People approaching retirement face a challenge. How do they convert the wealth in their home into a retirement income? This problem often prompts the owner to sell their home and buy a less expensive home.
This makes sense since a large house is not always practical for retirees. It may be because much of the house is not used, or because the upkeep has become too difficult. On paper, selling your home and buying smaller should increase your savings, as well as lower your monthly costs. But it is not always so simple.
Is downsizing right for you?
Let’s define what we mean when we say downsizing. It means moving to a less expensive home, not always a smaller one. Downsizing is often associated with retirees. But high prices are prompting working families to look at selling their home too.
Downsizing can have a big impact on your lifestyle as well as your finances. There are many lifestyle factors to consider such as access to local health care, distance to family and work, property preferences, and the emotional attachment to your home. Here we will focus on the financial aspects of downsizing.
The first financial thought that springs to mind when thinking about downsizing is how much can I get for my home. There are many other financial considerations too. So start by making a list of your assets and liabilities (debts). Financial Planners call this list a Net Worth Statement. The difference in your assets and liabilities is your net worth in dollars. Then you need to figure out how much a new home could cost. Now you almost have enough information to calculate how much wealth you can unlock. Transaction costs take a bite out of that.
Real estate transactions attract a lot of fees and expenses, so don’t overlook them. These costs include real estate commissions, land transfer tax, legal fees, moving expenses, and financing charges, to name a few. For example, selling a $400,000 home in Alberta and moving to a $300,000 home in BC can cost $36,500[4]. In this example, after costs, there was only $63,500 left over to pay down debt or save for the future.
The next financial area to think through are monthly expenses. Here you need to start with a list of your current expenses and then make another list for the new home. Costs that change when you move are mortgage payments, utility costs, maintenance fees (if it’s a condo) and property tax payments. But don’t forget other costs like commuting costs and car insurance rates that vary greatly depending on where you live.
If you’re retired, and the reduced living expenses are less than your after-tax income then you can relax and enjoy retirement. If you are working, the extra savings can allow you to reduce debts faster and save more for retirement.
Downsize thoughtfully.
It may be a mistake to think that you can sell your home and move into a cute little condo with masses of cash to fund your lifestyle. It is possible, but make sure you have realistic expectations and determine how much you will actually net from downsizing.
Refer to your financial plan and ask yourself:
- Will this relieve my debt burden?
- Will this get me the retirement income I need?
- Will this allow me to retire earlier, or increase my income in retirement?
Once the move is complete you must do what you said you were going to do. Pay off that debt. Get professional advice on how to invest the savings to generate a reliable income.
The decision to downsize can be a difficult one to make. Use caution. Each family is unique. Be sure that the figures make sense. And be sure that the move has a meaningful impact on your financial plan.
About Colin Barry – Canfin Financial Group
Colin Barry is a Certified Financial Planner who works with families and small businesses to plan their finances and make the most of what they have. Visit www.colinbarry.ca for more information. Fee for service financial planning and investments provided through Canfin Magellan Investments Inc. Insurance provided through Canfin Capital Group Inc.
[1] MacLean’s, January 27, 2015, “Are you in the middle class?”
[2] Manulife Bank Homeowner Debt Survey, November 2016
[3] The Financial Post, March 15, 2017, “Household debt hits fresh record, with Canadians owing $2 trillion by the end of 2016”
[4] Boomer and Echo, July 16, 2014, “Why Downsizing Might Not Save Your Retirement”
