Downsizing may not be the right answer

Baby boomers looking to fund the retirement savings gap by downsizing the family home are likely, in many cases, to be clutching at straws.

Baby boomers looking to fund the retirement savings gap by downsizing the family home are likely, in many cases, to be clutching at straws.

Boomers have seen the value of their homes rise steadily over the years. And for most, their houses will be worth much more than their super.

But there are some reasons for thinking that the downsizing strategy may not be all that it is cracked up to be.

Firstly, for many, there is likely to still be a mortgage on the house at the point of retirement. And repayment of the debt would have to be factored in the equation. Most boomers will want to have at least two, or more likely three, bedrooms in their smaller, post-retirement house so that family and friends can stay. But good quality, medium-density housing that is close to the city centre is expensive.

Then there are the large transaction costs of buying property, such as the stamp duty. Many planning to free up money for their retirement by downsizing may find it is not the quick fix that it seems.

For all but the wealthy, the only way to free up substantial money for their retirement would be if they moved out of the city.

But they will be away from family and friends and would have to accept that once they make the move, they will not be able to afford to move back to the city. Another tempting solution is the reverse mortgage, which is a way for cash-strapped retirees to release some of the equity in their house while staying in the house.

They are more generally known as "equity-release" products. They are usually available to over-60s who own their home outright. The money can be taken as a lump sum or as an income stream.

As there are no repayments, the loan is repaid when the house is sold, usually when the owner goes into a retirement home or an aged-care facility, or dies. But because there are no repayments on the loan the interest on the loan is capitalised.

The debt can balloon, especially over long periods leaving less for the owner to fund aged care after the house is sold and the lender is repaid. Another issue that needs to be carefully considered is the impact, if any, that a reverse mortgage will have on pension eligibility. Also be aware that there is a cheaper alternative to reverse mortgages.

Centrelink and Department of Veterans' Affairs have a Pension Loan Scheme where those on a part age pension can take out a loan that is repaid when the property (which can be an investment property) is sold.

But the loan has to be taken as income stream and is limited to that which, when added to the part-pension, takes them to the maximum pension. Subject to conditions, the scheme is available to some retirees of age-pension age who are not receiving the age pension.


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