The baby boomer's guide to downsizing your home

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 Whether you are looking to free up money tied up in your current property or simply no longer need your large family home, it is important you carefully consider all your options before downsizing.

The New Zealand norm is that the bulk of accumulated assets are tied up in the family home, which is often too big and too expensive to maintain.  This is where the phrase ‘asset rich and cash poor’ comes in.  Small amounts of cash savings diminish quickly, leaving a situation where cash needed to fund day to day living expenses is locked away in property.

The challenge is how (and when) to convert some of that wealth.  One way is to ‘downsize’ by selling the family home and replacing it with a smaller property, apartment/unit or to go into a retirement village.  Careful consideration needs to be given to each option to decide which one is right for you. 

Downsizing your large home to a smaller one and/or subdivision
Releasing capital may be as simple as selling the large family home and purchasing a smaller, more modest (and cheaper) home.  There may also be an opportunity for you to subdivide and sell off a piece of land to release capital.  Given the proposed changes under the Auckland District Plan, the opportunities for this type of mini development will increase.  Obviously, there are costs to subdivision to watch for including Council requirements, surveyor’s and other professional fees.      

Apartments and units
Apartments or units are generally in unit title developments.  You purchase a share in the development. You are subject the body corporate rules and have to pay annual levies which cover general expenses such as insurance, maintenance, lighting, common areas.  A unit title property is usually cheaper and you generally don’t have to worry about building or grounds maintenance which is organised and undertaken by the body corporate.  However, it is important to factor in the annual body corporate fees, which can be high. 

Renting
If property ownership and the maintenance responsibilities involved do not appeal then renting might be the answer.  However, the uncertainty of rental increases over time and the possibility of being given notice to vacate may outweigh those factors.  In addition, if you change your mind and want to buy the market might have left you behind.

Retirement villages
Generally, in entering a retirement village you enter into an occupation right agreement which gives you the right to occupy the particular unit or apartment but gives you no ownership of the land or buildings per say. Usually, (unlike the Unit Title option) there is no capital gain on the purchase price you paid as property prices rise and a ‘depreciation fee’ is deducted on the sale of between 20% and 30%.  In addition, you will be liable for a monthly outgoing fee to cover rates, insurance and building maintenance on the property. This option is more about lifestyle and security but some retirement villages do offer capital gain on payment of a higher premium.

Reverse equity mortgage
A freehold property owner (i.e. mortgage free) might enter into a reverse equity mortgage with a lender. Typically, the mortgage funds are secured over your property without the need for you to sell it or to make mortgage repayments (until the house is eventually sold).  However, the interest payable on such a loan is far more than normal and is usually compounding. It accrues against the loan, so that you will be paying interest on interest.  The ever increasing amount of the loan is repaid when the property is sold at a later date.  This will release cash funds straight away but there will be a lot less funds available upon the eventual sale of the house.

If you would like to discuss any matters related to downsizing, please contact Carolyn Ranson, Property and Elder Law specialist at Smith & Partners by phone on 837 6891 or email
carolyn.ranson@smithpartners.co.nz