Why Downsizing Doesn't Always Upsize Your Bank Account 🏡 ↘️ 💰

Downsizing no longer guarantees you will release equity from your current home…

In today’s market, downsizing no longer guarantees you will release equity from your current home. Before we understand why, let’s first clarify what exactly is downsizing and equity.

Downsizing, as the name implies, traditionally means selling your current home to buy something, more modest/less expensive and pocketing the difference.


Equity refers to the fair market value of your home, if you were to sell tomorrow, less any outstanding mortgage, or other loan(s), secured against your home that you owe.

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So why wouldn’t downsizing necessarily give you that influx of cash into your bank account to spend as you wish?

You know the saying, ‘less is more’...

Who knew that would ever be applicable to property. In today’s market, especially in certain metropolitan and coastal postcodes around Sydney and Melbourne, downsizing from a 4-bedroom house to a 3-bedroom apartment for example, doesn’t always equal a cash positive position. Once you’ve factored in often forgot about expenses such as stamp-duty, strata fees, and removalists, the comparable price of apartments to houses in today’s real estate market can sometimes mean downsizing is simply not worth the financial and emotional stress.

4 Bedroom House in Randwick; $1,650,000

4 Bedroom House in Randwick; $1,650,000

Source: realestate.com.au (valuations accurate as of January 2019)

3 Bedroom Apartment in Randwick; $1,500,000

3 Bedroom Apartment in Randwick; $1,500,000

What other options do I have…

If downsizing is not the right option for you, or simply doesn’t make financial sense, you may want to consider releasing equity from your home.

Equity release refers to range of products letting you access the equity (cash) tied up in your home (if you are over the age of 55), without moving.

Equity release products such as reverse mortgages and home equity loans have got a bad rap, and rightly so in some cases. EquiKey exists to set the record straight on these bad actors and prices your equity upfront, for investors and prospective homebuyers to buy. You can see who’s bidding on your equity and choose which bid to accept. Unlike a reverse mortgage or home equity loan, there is no debt to pay back when you sell your home, so whether you live in it for another 2 or 20 years, you will always retain 100% of whatever share you haven’t sold. You can find out more about Equikey and how we differ to a reverse mortgage here.

If you have any further questions you can contact us or check out our FAQ page.

Whether considering downsizing or equity release, EquiKey recommends speaking with a financial advisor or lawyer to fully understand how each may effect your unique circumstances. If you’re unsure where to go for this advice, just ask, and EquiKey can refer you to an independent advisor near you. EquiKey is a marketplace and does not offer any financial or legal advice or services.

A Simple Guide To Retirement Financing

Sources of Income

There are several sources of income you can draw on to finance your retirement. They are:

  • Superannuation

  • Home Equity Release

  • Age Pension

  • Personal Investments

  • Part-time employment

  • Downsizing

Superannuation

Personal superannuation (often simply known as ‘super’) is money that’s put aside and saved while you’re working, so you can enjoy a regular income later in life when you retire.

One major benefit of super is that most people pay less tax than if they had invested the money in personal investments.

The downside is you can only generally access this money (tax-free) after you’ve turned 60.

Once you’ve retired you can choose to withdraw this money as a lump-sum (up to $205,000, tax-free), as a regular income (account-based pension) or purchase an annuity. Annuities are generally sold by banks and insurance companies and provide a guaranteed income for a defined period of time or the rest of your life in return for an upfront payment. These generally pay less than account-based pensions.

Home Equity Release

There are two types of equity release products:

  • Reverse mortgages - You use the equity in your home to borrow money

  • Home reversions - You sell a proportion of the equity in your home

EquiKey falls into the home reversion category of these products.

Using your home equity may be suitable if you:

- want to supplement your retirement income and are comfortable managing sum this over a number of years

- need a lump sum for home maintenance or renovations so you can stay in your home

- want money for a critical need e.g. medical treatment

- need a deposit to secure aged care accommodation until you sell your home.

A reverse mortgage may NOT be suitable if:

- the debt could eat into the money you need the future for medical bills, aged care or home maintenance

- you are thinking of investing, because you would be risking your entire home - not just the portion you are investing.

*You should consider your future needs, speak to your family and obtain financial and legal advice before proceeding.

Age Pension

There are different types of pensions available depending upon on how much income you receive from other sources and what your assets are worth. The most relevant pensions for retirees are:

  • Disability support

  • Sickness and mobility allowances

  • Bereavement allowances

  • Wife pensions

  • Widow B pensions

  • Carer payments and allowances

The Department of Human Services' Guide to Australian Government payments describes payment rates and eligibility criteria for all payments made by Centrelink and the Family Assistance Office.

Personal Investments

This can be anything from shares to investment property to managed funds (where your money is pooled together with that of other investors and invested by someone on your behalf in return for a fee or commission). We strongly recommend seeking financial advice before investing personal funds.

Part-time employment

As people today are living longer and healthier lives than ever before many are using part-time work as a means of easing into semi-retirement before retiring fully. This can boost the amount of money you have when you do decide to retire but keep in mind the income you earn can affect your age pension. You can find out more information through Centrelink.

Downsizing

By the time you are considering retirement you may have substantial equity in your home. You may even own your house outright. Selling the family home is one way to free up cash for retirement. The money you receive can be invested in shares, term deposits, managed funds or superannuation.

However, selling the home where your children were raised and leaving behind neighbours and friends can be difficult and stressful. Add to that the challenges of relocating to a new area, moving into a smaller space and making new friends and, suddenly, staying put might seem like a good idea.

If so, some possible alternatives are:

  • Converting your home to dual occupancy so you can live in one half and rent or sell the other half

  • Renting out some rooms; however, this has tax implications and may affect your Age Pension - seek financial advice before proceeding

  • Considering an equity release provider such as EquiKey.

If you intend to stay in your house for the long term, you may want to renovate your home so that it's safe and easier to move around as you get older. The My aged care website has information on getting help to stay in your own home so you can maintain your independence for longer. 

How EquiKey is helping senior Australians live better in retirement

Introducing EquiKey; Australia’s only peer-to-peer, home equity release solution.

Safe, secure, and fair. EquiKey is helping senior Australian’s leverage the value of their home for better living in retirement.

Use our free Home Equity Calculator tool to find out how much your equity could be worth.