January 2024

Introduction

There are many ‘downsizing’ and related topics that we will be addressing in this blog post, some topics in greater detail than the others. We will endeavor to provide a balanced article for your reading pleasure.

Where Are You Today?

The thought of moving to a smaller home has been top of mind for many homeowners who are approaching retirement. Perhaps your retirement is on the immediate horizon, or not for many years. That being said, your children may have all moved out and the house has become just a bit too much for you to maintain and possibly afford.

There could be other reasons for wanting a smaller home. You may have financial or marital issues. Other reasons may include health issues, accessibility and safety, and the risk of falling down a flight of stairs may be another reason, if you live in a two-storey home.

Your reasons may also be related to just wanting a smaller home, with less clutter, or just a change of lifestyle, scenery or a fresh start in a new neighborhood or location.

Article Insights

This post will provide some insights about why people want to downsize and will also include the advantages and disadvantages of downsizing, along with the benefits of moving to a smaller home.

Initially, the thought of downsizing your home may feel both exciting and overwhelming all at once. However, with careful preparation and planning, the move to a smaller home and a more minimalist lifestyle can have a very positive impact on both your lifestyle and your finances.

Planning and Research

One of the most critical factors of downsizing is to start your downsizing planning and research as early as possible, do your ‘homework’. This ‘early start’ includes, your future home and lifestyle research, desired geographical location (real estate values), along with decluttering, and taking an inventory of your belongings. Ask yourself ‘What do you really need? What will you have room for in the future? What can you give away or sell? Although there are many more elements to downsizing, these points are essential and should be included in your initial downsizing change of mindset.

Although downsizing may be a fit for many, downsizing is not for everyone, we’ll try to explore many of the factors related to downsizing throughout this article.

Why Do People Downsize?

What Exactly Is Downsizing?

Typically, downsizing is the act and process selling of a larger home in exchange for a much smaller home, along with the advantages and benefits that decision provides.

Lifestyle Change

The needs and lifestyle you have now are likely much different than your needs and lifestyle 25, 30 or 35 plus years ago. In addition to not needing a large home and property, you may want a different lifestyle than the lifestyle you had years ago or at earlier stage in your life.

Your downsizing needs should reflect this change in lifestyle. At this stage in your life, you hopefully have a tidy sum tied up in the equity in your home, which can be very beneficial with your upcoming downsizing plans and lifestyle change.

Living Space Reduction

The motivation for downsizing varies. In most cases, the primary reason is the preference for a reduction of space and the cost benefits that accompany such reduction.

Other Downsizing Motivations

Other reasons may include:

Your home is just too big, not using the rooms. Upkeep of unused rooms etc. The home just doesn’t fit your lifestyle anymore
You want to pay off debts and stay out of debt
You can now manage your career remotely, with no need to have a home so close to work. This may provide the motivation of home downsizing
Your children have grown up and moved away, so there is no need for so much space
Access to additional capital (usually tax free). Using your home’s equity for retirement income or pay off debt when moving to smaller home
Not living in the home year-round, e.g., ‘snowbirds’
Travel aspirations funded by additional equity
Increasing energy costs and reduction in monthly bills. Heating and cooling of large home when rooms are not being used. If your monthly household expenses are continually increasing and your income is fixed, this may be a cause for concern
You may be falling behind in your home upkeep or maintenance and cannot afford those expenses. You may want to avoid future home projects or keeping up with major repairs, repairs which will need to be completed which may affect the home’s value
Moving closer to children and grandkids
Urban living and a lifestyle change
You may not be happy in your current neighborhood (changes over time), and you prefer to move to a more like-minded or age relevant neighbourhood or community
Reduced housework, including cleaning, maintenance, yard work, such as lawn care, snow shoveling etc.
Bungalow Selection and Availability. There may be a growing shortage of accessible single floor homes as you get older
You may have become a minimalist and have purged most of your belongings, or have decided to reduce your footprint on the planet and want to move to a much smaller home
Marital issues may be forcing you to downsize your home, along with the reduced costs and other potential options
Minimalist living

Financial Constraints at Retirement

As we will detail in the ‘Carrying a Mortgage While in Retirement’ section in this post, a growing number of Canadians will still have a mortgage at retirement age. A 2021 report (Statistics Canada) showed that people aged 65 years and older account for 13% of Canada’s mortgages.

Downsizing Alternatives

If your downsizing initiative is primarily due to financial constraints or financial issues at retirement age and you would prefer to remain in your home and have access to some of your equity, without increasing payments, there may be another alternative. This alternative isn’t a fit for everyone, and we will touch base on that alternative in the ‘Reverse Mortgages’ for Retirees section of this article.

Is a Reverse Mortgage a Fit for You?

We do not advocate for or provide Reverse Mortgages; however, we can help you decide if it’s a fit for you, and provide downsizing alternatives, if possible. If we are not your ‘closing’ lawyer, we can provide the mandatory preliminary legal counsel to you which is required by the lender and complete the initial forms. We are not suggesting, recommending, or promoting this alternative, we are just offering some insights for those who may have a financial burden and want to downsize but are unable to and need other alternatives.

The Benefits and Advantages for Downsizing

In addition to cost benefits, there are other downsizing benefits, including safety reasons and accessibility, reduced expenses, and maintenance to name a few.

Small Home Benefits

If you are considering downsizing, the primary reason may be related to the ‘literal’ definition of the term. You want a smaller home and the many benefits of a smaller home.

Smaller homes are usually much less expensive to buy, which may provide access to available home equity. This benefit is especially appealing if you move to an area with much lower real estate home prices, which provides more buying power for that unlocked equity in your home
Potentially lower municipal taxes
In addition to possibly being more unique, smaller homes are usually much less expensive to maintain, saving you money on monthly bills, therefore less stress about bills and upkeep. Smaller homes are often much more energy efficient; they use less energy and therefore may cost less to heat and cool
Smaller homes may reside in older communities with an older and larger tree canopy. This canopy may be appealing and offer energy efficiencies during the summer and the winter
Reduced risk of injury, e.g., stairs, large home, large yard etc. Your small home may be more accessible as you grow older
Less maintenance and cleaning. You have a lower or reduced burden of keeping your home maintained, and less costs
Smaller homes may offer a benefit of being more cozy and personally comfortable
Reduction on the number of decisions related to such a large home. Less clutter and less stuff

Lifestyle Opportunities

With the additional equity acquired from a downsized and cost-effective smaller home purchase, these additional funds can provide lifestyle opportunities and benefits, including:

Living in an area or geography with high retirement lifestyle appeal
Outdoor living activities
Entertaining friends in a cozy environment
World travel
Starting a new chapter in your life (e.g., widower/widow, empty nester, divorced)

How Downsizing Helps Empty Nesters

During your lifetime, you and your spouse may have upgraded your homes for career, geography/location, status, or for additional space reasons when you started your family. You may have upgraded even further as your family expanded and your space needs changed.

Future Planning

Fast forward twenty or so years, with the children starting lives of their own, you now have a large home with empty or unused rooms. This unused space wastes energy and adds maintenance costs.

Even though you or your spouse have many years before retirement, you’re considering the downsizing of your larger home to one much smaller. What’s the point of maintaining, heating, and cooling your larger home if no one lives in most of it? In addition, although your major appliances (e.g., air conditioner, furnace, etc.) and home structure (e.g., roof, windows, etc.) are in good and working condition now, major repairs and replacement will creep up over time.

Maintenance and Work Effort

Although home upkeep and housework, like house cleaning, yard work or shoveling snow are not issues at this point in your life, you either do the work yourself or pay someone else to do it for you, so that’s not a driving factor to downsizing currently, however this may not always be the case. In the future you may not have budget or the energy or health for these maintenance actives.

Downsizing will help you to continue to build your retirement nest egg, by decreasing your monthly expenses and potential larger home expenses or projects.

RRSP Top Up

If you’re both still working, you may be continuing to contribute to your RRSP’s and build savings. In addition to having access to available capital from downsizing to a smaller and lesser valued home, using that available equity can build your savings, or top up both your RRSPs, if you have the room to top it up.

Time for a Change?

In addition to the financial benefits, downsizing may offer the option of moving to a smaller home and lifestyle that is more specific to your current needs. Perhaps the neighbors you have known for years have moved away as their children moved away on their own, and the new neighbors moving in are starting families of their own? You may want to move to a smaller home in a neighborhood or community that fits your current lifestyle.

Financial Downsizing

There are numerous reasons why you want to downsize your home when you have a choice. However, there may be compelling reasons why you may be forced to downsize. The reasons may include:

Marital issues, such as separation, divorce
Death of a spouse
Debt issues
Loss of income
Home expenses (and municipal taxes) far exceed available income
Credit issues, cannot renew mortgage

Equity as an Asset – Bucket List

Aside from financial burdens, there may be those who have no further use for a home and want to use their home equity (while they are still healthy and energetic) to fund their bucket list. Essentially allowing them to use their home equity for travel, learning, working by choice not necessity, hobbies, or a different lifestyle at home or abroad.

Discretionary Income

The smaller home you are moving to usually is much less expensive in value than your current home, which means there will likely be significant equity that you will have access to. The smaller home may also cost less to maintain, so in addition to

The smaller home may also cost less to maintain, so in addition to having the equity funds from your larger home sale in your account, you may also have more discretionary income available every month.

Financial Flexibility

You have financial options if you want to pay down debt. If your home has increased in value over the years, you can pay down debt or invest the equity. Or, you may have additional financial goals you want to achieve. In addition, you may have a bucket list you want to check off, such as:

Renovations to the smaller home, to customize it somewhat to your needs
Smaller home projects, if required and if necessary. Update the smaller home’s roof, air conditioning and furnace, while you are active and healthy
Continued learning. Go back to school
Travel or live abroad
If you are healthy and active, activity-based experiences may be an option. ‘Once in a lifetime’ experience that you’ve always dreamed of and now have the financial means to do (specialized climbing trips, cycling tours, wine tours, around the world boat cruises etc.)

Being A Minimalist. Some Just Want a Smaller Home – Less Stuff and Less Space

Smaller Footprint

There are those, who over time, have decided to reduce their footprint on the planet, and liberate themselves from consumerism and owning unnecessary stuff and clutter in their lives.

Some may go to the extreme and divest themselves of most of their belongings and live in a modest lifestyle and home. There are others who wouldn’t consider themselves minimalists, however they welcome life in a smaller home free of the stuff and clutter they had with their larger homes.

Simplistic Lifestyle

A smaller home can offer a more simplistic lifestyle to those who can be happy with less, including:

More time and energy to spend on things you enjoy doing. Smaller homes are easier to clean and maintain, and allow more time and energy for other things you enjoy
Less clutter. Smaller homes have less space for storage, so there is less time spent on decluttering your living area
Financial freedom. More money at the end of the month. Reduced property taxes, and less or no debt and worries about unmanageable payments
Less space to want to fill things with, therefore less spending
Less things, less stress. A home is more visually appealing with less clutter
The less you consume for your smaller home, the better for the environment

Downsizing Isn’t for Everyone

There are numerous advantages to downsizing your home, however downsizing may not be a fit for your lifestyle or may not be an alternative that is available to you.

Research, Planning and Work Effort

As mentioned previously, prior to downsizing your home, you will need to do your ‘homework’. Proactive ‘downsizing’ research preparation is required and essential.

Downsizing Decisions and Work Effort

You will need to liberate yourself from much of your physical belongings, which won’t fit in your smaller home. Preparation is required for your current home’s sale and all the work effort and costs required for that transaction (required fixes/maintenance to the home, moving costs, closing costs, legal fees, realtor fees, etc.). Your remaining belongings will need to move to your downsized home and prepare your future home.

These activities are worth the time and effort for those that want to downsize, however for those without the resources required to prepare and act on these downsizing activities, downsizing may prove to be difficult.

Downsizing; Reflect and Reconsider

When you downsize your home, you will need to reduce the amount of stuff you have, such as furniture, clothes, equipment, tools, unused items, collections etc. This is a selected list of reasons for not downsizing:

You’re happy with the size of your home and neighborhood you live in and don’t want to move
Property values in the geographic areas you were interested in have increased proportionally with your current home’s value, therefore reducing the surplus home equity appeal
Financial goals. If you are considering downsizing for financial reasons, does the act of downsizing achieve these goals? Will it lead to a better overall financial picture for you?
Boomerang children. Your children have moved away, however there may be life events that may compel them to return home to live with their parents. Having that additional, currently unused space, means your children have a place to stay if their circumstances warrant it.
Home office(s). More and more people are working from home these days. A smaller home may have an impact if you and your spouse both work from home. If you both have your own home offices in your current larger home, a smaller home may mean that neither of you will have a home office and you both may be working in an open concept.
Home workouts. Same goes for working out, you may not have a workout room in a smaller home
If you enjoy having guests or family over to entertain, especially overnight, you may want or need additional space for additional guests staying the night
Personal space. Some people just need more personal space, larger homes offer options for those who need more personal space
Will your furniture fit in a smaller home? If you have larger furniture, workout equipment, office equipment, home entertainment devices (large screen TV you don’t want to part with), a piano for example, they may not fit in a smaller home
You may be concerned with the change in social status that a larger home may provide
You may not want to move away from friends or family, including your grandchildren
Difficulty finding a smaller home that meets your needs, including accessibility, in the neighborhood you prefer to live in
The added burden of travel to see your family if the smaller home is farther away
You enjoy the conveniences of your current home location
If you are not able to purge your stuff, you may not have the space in a smaller home
You have the financial means to keep up with monthly upkeep of your home
You’re healthy and active and don’t mind the house maintenance and are confident you will be for the foreseeable future
You may also have the financial means to have someone else perform the maintenance and upcoming costly projects such as a new roof, furnace, air conditioner etc.
You do not have equity in your home, which may make it difficult to benefit from the downsizing equity exercise
Downsizing will require a purge of your household items; a smaller home won’t have the room for your stuff. Perhaps you’re not ready for this undertaking?
Lastly, this smaller home may be your last. Do you see yourself growing older, safely, and comfortably in this home?
Proximity to your medical specialists, doctors, dentists etc. or community resources

Disadvantages of a Bungalow Vs. a Two-Storey Home

Although a bungalow or single-story home may be an appealing choice for your downsizing destination home, there are factors that should be considered.

Many bungalows were built many years ago, which means they may have the advantage of a larger property size which can offer more privacy, they may also need more outside maintenance.

Home Size Needs and Considerations

In some cases, the internal size of the bungalow can be much smaller than a two-storey home, therefore upkeep, maintenance and cleaning of the home requires less effort. Larger bungalows that offer similar square footage to a two-storey home will have a much larger footprint on the property lot size, and more work effort is required.

Bungalow Availability

Many newer homes have two storeys and are being built on smaller lots. This also means that bungalows may be in high demand as people want to downsize in an area. Bungalow availability may be limited and may also be selling at premium prices.

A single storey home generally has limited number of stairs, which is safer and beneficial as the homeowner ages, and an added safety benefit when your grandchildren visit. A single floor also makes it much easier when babysitting your grandchildren. That being said, a bungalow may be a bit noisier. A single storey home has all the rooms on one floor, which means the noise from the living area, dining room and kitchen may disturb those who are sleeping in the bedrooms which are located on the same floor.

Bungalow Renovation

If you do decide to downsize to a bungalow, be aware that bungalows may be owned by older people who have dated preferences and tastes, and different lifestyles. You may want to make changes and renovations. Having said that, bungalow renovation is much more flexible, as you have less load-bearing wall restrictions.

Bungalow Security

If you are security conscious, a bungalow may not be a fit for you, especially if you prefer to have open windows or sleep with windows open, compared to a two or three storey home. Most if not all windows on a bungalow or single storey home will be accessible or near accessible from ground level.

Bungalows have merits for the right homeowner who understands its advantages and disadvantages of the style of home.

Carrying a Mortgage While in Retirement

Mortgages and Retirement

Although not ideal for those retiring, there are many individuals and couples who will be carrying a mortgage into retirement. A recent Globe and Mail article (‘More Canadians Are Carrying Their Mortgages Into Old Age, and It’s Complicating Retirement Plans’) detailed that many retirees will still be paying off their mortgage into retirement, and that number is increasing year over year.

Statistics Canada Report

In 2021, a Statistics Canada report showed that 1.5m people older than 65 years still had an outstanding mortgage on their property. CMHC data reported that people in this age group account for 13% of Canada’s mortgages, compared to 7% in 2017.

Many retirees who are considering downsizing, have considerable equity in their home. They may have timed their mortgage renewal with their retirement and downsizing plans and are planning on paying their current mortgage off with the eventual home sale and then using that equity to purchase a downsized home outright. This could be a possible strategy, depending on your home sale funds and the amount of the new downsized home. Mind you, the home sale equity may use all the equity of previous home sale, which would negate any other retirement plans you had for that equity.

Mortgage Approvals at Retirement

Carrying a reduced mortgage (access to some of your previous home’s equity) on the downsized home would be demonstrating to a mortgage lender that you have the financial resources and means (home sale equity and retirement income) at retirement to service your downsized mortgage debt (after downsizing). This option may be more appealing to a lender if you are essentially debt free, and the mortgage value is reasonable and it’s a short mortgage term. Depending on the amount of your equity, this approach could be a viable option for some, however, depending on the value of your equity, your financial resources and retirement income, it may be best to adjust and align your expectations with your lifestyle and financial means.

There is another mortgage financing option for retirees, that option is a ‘Reverse Mortgage’, which we will touch base in the next section.

Reverse Mortgages for Retirees

Reverse Mortgages Pros and Cons

Most of us have watched the commercials on TV about Reverse Mortgages. Some of you may even currently be pursuing a Reverse Mortgage. However, prior to your finalizing a Reverse Mortgage, it may be beneficial to consider the many benefits of downsizing outlined in this article.

Downsizing Challenges

For those who need to downsize for lifestyle, financial or marital issues, and those efforts have been met with challenges, such as low post sale funds equity after purchase (e.g., downsized home has a higher price than expected), there may be another option if you have financial burdens yet can’t make the downsizing alternative happen.

A Reverse Mortgage isn’t for everyone. We do not advocate for or recommend Reverse Mortgages. We are just providing an alternative to the few that may be in a financial bind and cannot downsize.

Equity Access

A Reverse Mortgage doesn’t get you out of your home, but it’s does give you access to your some of your equity with the benefit of making no payments on the Reverse Mortgage (there are terms and conditions).

Although Reverse Mortgages and Downsizing are two separate approaches, they both have their merits as a remedy for the right issues or challenges, or lifestyle. Everyone’s circumstances differ, a Reverse Mortgage may be the answer for some individuals, however an effective downsizing strategy could help cut costs with minimal risks, compared to a Reverse Mortgage strategy.

Property Value Increases

For those people who are making plans to downsize and reap the rewards of high current home resale with the potential high equity as a result, they are often surprised or shocked when they find-out that the geographic areas they were planning to move to have also increased significantly in property values, possibly negating a significant home equity nest egg.

Misalignment of Expectations

These increases in property values may make the downsizing strategy much less appealing for some. For those who are still servicing a mortgage and still have many years left on their mortgage, the downsizing approach (and access to funds from the equity) was part of their retirement, financial and lifestyle change strategies.

If a downsizing plan doesn’t come to fruition because of a misalignment of expectations and property values, there may be an option for some that allows them to stay in their current home, get access to their current home’s equity, and not worry about mortgage payments.

A Reverse Mortgage approach wouldn’t be a thorough downsizing exercise. It may however provide an alternative for those who want to downsize but are not able to or are delayed in their plans to downsize when property values in the desired rural or geographic areas potentially decrease in value.

What is a Reverse Mortgage?

A reverse mortgage is similar to any other typical loan that is secured by way of a mortgage against a piece of real estate you own. The unique quality to a reverse mortgage is that there are no mandatory payments required to be made against the principal balance of the loan amount or the interest that accrues. Instead, interest will accrue on the loan amount, both of which will become due when the borrower(s) moves, sells the home they are living in, or passes away.

Reverse Mortgage Criteria

A ‘Reverse Mortgage’ isn’t for everyone. In fact, you must be living in your home, be 55 years or older to qualify and own a home with $250,00 minimum value.

A Reverse Mortgage may appeal to those who have limited savings, yet have significant equity in their current home, and own their home outright, or have little to no balance on their current mortgage. A Reverse Mortgage can provide up to 55% of a home’s equity, for example: if you own a home that is worth $2,000,000, you may qualify for a loan equal to up to 55% of the equity, being $1,100,000.00. In this scenario, the lender would advance you the loan amount, and no regular payments would be required to be made until the home is sold or the owner passes away.

Reverse Mortgage Details

Homeowners must be 55 years or older, the older you are the more you can borrow
Primary residence. Must live in the home six months out of each year
For detached, semi-detached, townhouse or condo’s
Property title holders are joint borrowers
Interest accumulates
Current mortgage will need to be paid out first

Reverse Mortgage Benefits

Access to home equity (tax free), up to 55%
An option if you have major expenses, limited retirement funds or income
No monthly mortgage payments
Stay in the home you have now (with all your stuff)
Use the funds for the list you were planning on with the downsizing approach

Reverse Mortgage Disadvantages

Higher interest rates, which can vary. Reverse Mortgages will have higher costs than a conventional mortgage
Possible forfeit of future home equity. This means that if you do eventually sell your home, you will have less equity available
Compounded interest. Interest can accrue quite quickly under a reverse mortgage, eroding the equity in your home
If you have a balance on your current mortgage, the Reverse Mortgage funds would need to pay out the current mortgage balance first. Would there be any funds leftover? If not, other than the ‘no mortgage payments’ benefit, is it worthwhile or worth the risk?
Pre-payment penalties. If you pay off the reverse mortgage before the end of the term, there are likely to be pre-payment penalties that will need to be paid as well.
Reduces home equity
Possible issues if home values fluctuate. Specifically, the potential loss in home equity.
Legal fees. The fees are a disadvantage, however the purpose of the fee is an advantage, if you are considering a Reverse Mortgage. An independent lawyer (ILA, Independent Legal Advice), separate from the lender’s lawyer is required to ensure the person(s) signing a reverse mortgage loan is of ‘sound mind’, aware of all the terms and condition and registration and processing fees
Retirement income from the start of the Reverse Mortgage would need to be sufficient to cover all home utilities bills, property taxes, expenses, etc.
Set up, Closing/Administrative fees

Conclusion

While downsizing may initially appear to be a daunting task and there are many tasks that will need to be attended to, with thorough and thoughtful planning your downsizing exercise can be both financially beneficial and rewarding as a new lifestyle opportunity.

We trust that this guide will provide some direction and value while performing this important next step.

We’ve included one of our previous blog posts which may also be of interest to you.

Six Critical Factors To Consider Before Buying Your Next Home

If you would like additional information about Nichols Law, please visit our website.

Sources and Additional Information

Disclaimer

Sources and links are provided for source credit and attribution, and for additional information purposes only. Nichols Law is not affiliated, associated, authorized, endorsed by, or in any way officially connected with any of the sources or links provided.

10 Tips on How To Downsize Your Home, Rocket Mortgage

How To Downsize Your Home in 6 Simple Steps, LifeStorageBlog

Why Downsizing Your Home in Retirement May Not Be As Simple as You Think, The Globe and Mail

Should You Stage Your Home When Selling?, The Globe and Mail

Is It Time To Downsize Your Home?, Sun Life

4 Mistakes People Make When Downsizing in Retirement, Investopedia

Some Young Canadians Are Downsizing Their Homes To Cut Back on Their Expenses, Toronto Star

Downsizing Your Home in Canada: What You Need To Know, Pine

Downsizing After Retirement: A Complete Guide, HomeEquity Bank

The Top 5 Downsizing Mistakes, Good Times

Home Downsizing Pros and Cons, the balance

What’s the Perfect Age To Downsize?, webbuyanyhouse.uk