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Your dream retirement home

Downsizing to a maintenance-free unit by the beach may be your fantasy. But it might not be the money-maker you hoped for. Amy Hamilton Chadwick investigates.

9 March 2022

If you’ve been a homeowner for many years, you probably have a large chunk of equity locked up in your house.

Freeing up that equity can help you fund your retirement, and it’s been a cornerstone of Kiwi retirement plans for generations.

But although downsizing is easy in theory, in real life it’s complicated – and emotional.

It’s not always easy to say goodbye to the home where you raised your children, or your favourite neighbours, or the familiarity of your community.

And you need to make decisions on where you’ll go, how you want to live, and how much equity you can realistically free up.

Enough for ‘a nice lifestyle’

About five years ago, John and Carol March came up with a plan to downsize and move out of Auckland.

They had a valuable four-bedroom home, but with all three daughters having moved out, the couple started looking for a new place to live.

They “motored around” New Zealand and eventually decided on Papamoa Beach, buying a three-bedroom single-level home there in 2020 and moving once the April lockdown was over.

“We always said once the girls were off our hands we would start looking, then it just seemed to fall into place,” says John, 67.

The move coincided with Carol’s job in the tourism industry being cut, and John’s health deteriorating.

“Letting go of our life in Auckland was difficult, but at the end of the day you have to look at the sensible side.

“We freed up enough money to give us a nice lifestyle, that was the whole point of it. But it wasn’t a phenomenal amount of money. We’re mortgage-free, we can have a new car and a nice lifestyle.”

Plan ahead

Early planning, like Carol and John’s, is a great way to successfully downsize. They spent two years looking at different sized houses in locations across New Zealand, getting a feel for the prices. Their realistic expectations made their downsizing a much smoother process.

Without planning, the complexities of downsizing can come as an unpleasant surprise, says Lisa Dudson, director of Acumen.

“When you get into the practicalities of downsizing, people often say, ‘It’s not as good as I thought it would be’.

“If you’re going from Auckland to Bluff, that’s an awesome strategy. But downsizing in Auckland is a challenge; the cost of a smaller, nicer house is often the same or higher compared to your family home.

“Other places are expensive too now – the theory is easier than the reality.”

Dudson says her clients who have a clear plan for moving into a retirement or pre-retirement phase find the transition the easiest.

Know where you’d like to live and understand the market value of both your home and the type of house you plan to buy, she says.

By doing the sums, you can calculate which compromises you’re willing to make: location, size of house or retirement lifestyle.

“Plenty of my clients downsize and move to beachy lifestyle locations, sometimes working part-time or remotely.

“It can free up a bunch of cash if you do it right. But other people have been forced into it because they literally cannot afford to retire, and they have all their money tied up in a home.

“Ideally, you should use your investments to maintain your standard of living, then use downsizing as a last resort.”

Stay put and draw down your equity

When downsizing isn’t cost-effective, or you don’t want to move, you can stay in your home and tap into your equity using a reverse mortgage or ‘home equity release’.

This allows you to borrow against your equity to fund your lifestyle, with the debt repaid when the house is sold.

This can be an excellent way for older New Zealanders to live off their equity, although the higher interest rates can sometimes seem concerning to family members, says Dudson.

“The interest rates are higher, but a better lifestyle does have a cost. Do you want to sit in your house feeling miserable because you can’t afford to fix a leak or turn on the heater?

“Reverse mortgages are a fantastic tool, although if you’re very healthy you wouldn’t want to start it too early. I have several clients who are single women in their 60s, who have homes but only a small amount of savings.

“I recommend they use their savings and then use a home equity release when they’re around 75.”

Think about a downsized life

What does downsizing mean to you? Is it a smaller house in the same area, moving to a new location, or something else altogether?

How much money will it realistically free up – and how many years of retirement will that money fund?

The questions that come with downsizing should be part of your larger financial planning, alongside other big questions about how you live now, how much you need to invest for the future, and your larger life goals.

The better your planning and execution, the fewer compromises you’ll need to make later in life.

“Paying off your own home by retirement a no-brainer, you must do it,” says Dudson, “but your home should not be your only retirement strategy.”

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