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.
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.
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.
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.
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.
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.
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 reasons may include:
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.
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.
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.
In addition to cost benefits, there are other downsizing benefits, including safety reasons and accessibility, reduced expenses, and maintenance to name a few.
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.
With the additional equity acquired from a downsized and cost-effective smaller home purchase, these additional funds can provide lifestyle opportunities and benefits, including:
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.
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.
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.
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.
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.
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:
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.
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.
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:
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.
A smaller home can offer a more simplistic lifestyle to those who can be happy with less, including:
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.
As mentioned previously, prior to downsizing your home, you will need to do your ‘homework’. Proactive ‘downsizing’ research preparation is required and essential.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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