Wealth Insights - August 2016

Wealth Insights

August 2016

Downsizing: Opportunity or Trap?

Cashing in on a hot housing market shouldn't be your only consideration

Is it time to downsize your home? That's a question sure to surface once the kids leave or the upkeep becomes more than you bargained for.

Plus, in 2016, there's our booming real estate market to factor in. If you are a long-time owner of a single detached home anywhere in Metro Vancouver, you have seen a dramatic rise in your equity, making it tempting to cash in. More of us are counting on our residences for future financial security. A new survey reveals one in three Canadians aged 60 plus expects downsizing or selling property to help fund retirement, six times the ratio reported by current retirees.

A move to a smaller abode can do wonders for your finances and your lifestyle. But not always. The trick is to look past the dollar signs alone so you make the right choices.

Why downsize?

If you are thinking about downsizing, there are plenty of reasons to do it.

Boost your retirement savings. A key benefit of selling your principal residence is the proceeds are tax-free. Those are funds you can spend in retirement on things like travel, entertainment, hobbies or buying a vacation property. Alternatively, you could invest that capital to generate regular income.

Retire early. Wealth from a home sale may make it possible to retire early, or, keep you from having to work part-time to supplement your income.

Enjoy a simpler, cheaper lifestyle. A detached house can be a lot of work to maintain, especially as you grow older. When you no longer wish to mow the lawn and do repairs, or don't want the hassle of finding reliable people to do these chores, moving into something smaller can make sense. With less square footage there is the potential to cut your utility bills and property taxes. If you are still carrying a mortgage or other debt, downsizing can help you reduce or even eliminate those obligations.

Help your kids buy in. The frothy real estate market that has led you to a handsome profit is also making it difficult for the next generation to buy in Metro Vancouver. Selling your home frees up capital which you can use to assist your kids with the down payment they need to get into the market.

What to consider

While the advantages of downsizing are clear, they don't always materialize. That's why it is important to first review your individual circumstances – and challenge your assumptions – before deciding if downsizing is right for you.

Evaluating your housing needs

There is no shortage of alternatives to staying in your current home, from moving into a smaller house to choosing a strata property like a condominium or townhouse.

While being located close to schools or work were once priorities, its being near family, shopping and services which will probably take precedent in the future. That's something to remember if you are contemplating moving to a smaller town or rural community which may have fewer conveniences.

Take your health into account. Will a home you are considering allow you to age in place successfully? Are there too many stairs? How close is it to doctors, clinics and hospitals?

Gaining simplicity through downsizing sometimes means losing out in other areas. Condominium living, for example, brings the risk of sharing a wall with a noisy neighbour. The strata corporation's regulations could restrict pet ownership, activities you enjoy like barbecuing, or even the style of window coverings you choose for your unit.

Do not overestimate your financial upside

According to Royal LePage, the median price of a two-storey detached home in Greater Vancouver topped $1.4 million in the second quarter of this year, close to a 27% jump over the same period in 2015. But, the financial rewards from selling may not turn out as generous as you would hope.

The downside of unloading your home in a hot market is you will likely have to pay top dollar for your next one. That's why the profit angle works best if you are relocating from a high-priced community to a less expensive one. Swapping an older home in the suburbs for a new luxury condo in the heart of the city could limit your net gain substantially.

Another consideration? The expenses surrounding buying and selling. Real estate commissions, taxes, moving costs, appraisal and legal fees – they can add up to thousands of dollars in the end. If you are purchasing a $500,000 home in BC, generally prepare to pay about $8,000 in property transfer tax alone.*

In some cases, moving into a strata property will save you less than you might expect. Take monthly maintenance fees for instance. They can be higher than what you are spending now to maintain a larger home, especially when they pay for amenities like swimming pools or gyms which you may never use. And, be prepared to chip in for special assessments to cover large, one-time items, like a roof replacement.

The lesson is if you are counting on a windfall from selling your home, take the time to do your research so you have a detailed picture of the financial outcome before you commit.

Are you emotionally ready to leave?

Moving from the home where you raised children and celebrated special occasions can be trying emotionally. It means saying goodbye to neighbours and perhaps the community you have developed strong ties to. What's more, the situation has the potential to stir up conflict with adult children hoping to inherit the place where they grew up.

Be sure you are ready emotionally, not just financially, to uproot and start a new chapter in your life.

Look at alternatives

Just as there are advantages to downsizing, there are equally good reasons to stay put. You are somewhere that's familiar and comfortable. You know the neighbourhood and its people. Maybe you want to eventually leave your home to your kids, or have another option for housing an elderly parent.

The good news is there are strategies to take advantage of the real estate equity you have built to create the lifestyle you want, without selling and moving, whether that means transforming your residence to suit you, or seeing the world.

Reverse mortgage. A reverse mortgage provides a tax-free source of income by tapping the equity in your home, without having to sell. Usually the loan and interest don't have to be repaid until the house is sold.

While you won't have to make regular debt payments, with a reverse mortgage interest still accumulates, which will gradually erode your equity. That's an important point to remember when planning your estate.

Home equity line of credit (HELOC). With today's historically low interest rates, a home equity line of credit can be a sensible borrowing option. Typically offered at a financial institution's preferred rates, a HELOC lets you draw funds against your home's value as needed, up to your approved limit. The key to making it work is having enough steady cash flow to cover the interest payments.

Offer up a rental suite. Why not leverage the extra space you have in your home to generate rental income? The rental market in Metro Vancouver is the tightest in years, with demand continuing to exceed supply. Apartment vacancy rates locally are hovering around 0.8% according to CMHC, well below the national average of 3.5%.

A benefit is you will be able to claim expenses attributable to your rental suite against your income. Just be prepared for life as a landlord, which means dealing with tenants, repairs and the occasional bounced cheque. And with a basement suite, get used to the idea of having a little less privacy.

Renting out a part of your principal residence may affect your capital gains exemption in certain situations, so get proper guidance before you proceed.

Get the right advice

Downsizing your home can have major repercussions for your finances, and your happiness.

At Westminster Savings, our financial planning experts will help you dig deep into the pros and cons, so you can make the best choice for you and your family.

Call us at 604-517-0100 or send us your question online and we'll respond to you within one business day.



*Estimate based on current Province of BC property transfer tax rates of 1% on the first $200,000 and 2% on the portion of the fair market value greater than $200,000 and up to and including $2,000,000.