Downsizing your home can give you more money to spend, save for retirement or achieve other financial goals. But before making the move to a smaller house, carefully consider the pros and cons.
With "tiny houses" a hot trend, more Canadians are thinking about downsizing their homes. You might be considering downsizing if your children have left the nest, you're close to retirement, you want a lighter ecological footprint or you're just tired of maintaining a big home.
Financial advantages of downsizing your home include lower mortgage and utility costs, while disadvantages may include the cost of selling your current home and moving expenses. To help you decide if downsizing is right for you, we've rounded up the financial pros and cons.
Advantages of Downsizing Your Home
Choosing a smaller, more affordable home can leave you with more money for other financial goals, such as traveling, saving for retirement, building an emergency fund, paying off debt or paying children's college tuition. Downsizing your home can reduce your cost of living in several ways.
Smaller Mortgage or Mortgage free
If you currently have a mortgage, the mortgage for a smaller home is likely to be less than you're paying now. If you downsizing from a mortgage free home, You probably will pay off the smaller home and invest the remaining amount for your retirement or invest for your children.
More Affordable Home Insurance
The size of your home affects your insurance premiums, with smaller homes generally being less costly to insure.
Bigger homes generally need more maintenance, simply because there are more things that can break. Moving to a property such as a condo with a small yard can eliminate the cost of paying a gardener or purchasing garden equipment to maintain the yard yourself.
Cheaper Utility Bills
Utility bills are usually lower in a smaller home, since there's less space to heat or cool. Eliminating a yard (and lawn) can significantly lower water bills, too.
Fewer Auto Expenses
Move to a community that's walkable or has good public transportation and you might be able to give up your car—along with its maintenance, payments, insurance and fuel costs.
Lower Tax Bill
Because square footage is a factor in assessing a home's value for tax purposes, property taxes are generally lower for smaller homes.
Profit From Possessions
You'll undoubtedly have to get rid of some belongings before downsizing. Depending on the amount and value of items, you could make a profit selling furniture, clothing and other possessions online or at a garage sale.
Disadvantages of Downsizing Your Home
Moving to a smaller home also has some potential downsides, including:
Costs of Buying or Selling a Home
In addition to the costs of preparing the home for sale (such as new paint or flooring), you'll need to pay real estate agents' commission, closing fees and taxes. When buying your downsized home, be ready to pay closing costs.
The cost of hiring movers can add up. You may also need (or want) new appliances, décor or furniture to fit the new space.
Possible Storage Costs
If your new home lacks space for sentimental items or heirlooms you can't part with, you'll need to pay for storage space to house them.
Limited Work-at-Home Options
Working remotely can open up a wider range of higher-paying jobs than you can find in your current community. A larger home with dedicated office space can make working remotely easier, potentially boosting your income. However, working from home may be difficult in a small home where your only "workspace" is the dining room table or a corner of the bedroom.
Moving from a home in a quiet suburb to a condo in a bustling urban area is a dream for many. But easy access to shopping, restaurants and entertainment can tempt you to overspend until your new lifestyle eats up any savings from downsizing.
Planning to sell your home and rent instead of buying? Keep in mind:
- You'll lose any mortgage tax deduction.
- You won't build equity.
- Rent increases could eventually price you out of your rental.
Factors to Consider Before Downsizing
Even if downsizing makes sense from a general financial perspective, you'll want to consider current market conditions, your life stage and other factors before you make the move. Here are some things to think about.
- How diversified are your assets? Selling your home and paying cash for a smaller home can eliminate the need for a mortgage. But tying up too much of your net worth in your home's value could be risky if home values plummet. Even if you can afford to pay cash for your downsized home, diversifying more of your assets into investments such as stocks and your retirement funds may make more financial sense.
Is Downsizing Your Home Right for You?
Whether you plan to buy a smaller home right away or rent for a while, your credit score can affect your ability to qualify for a mortgage or rental. Check your credit report and your credit score. Get (or keep) your credit score in shape by making payments on time, paying down debt and avoiding new debt before applying for a mortgage or rental home.
Before making the big decision to move to a smaller home, review your overall financial plan and consider how downsizing might help achieve those goals. Talk to real estate agents to estimate your home's value. Then investigate home prices in your desired area to see if your home sale can pay for the smaller house. By making the downsizing decision with all the facts in mind, you can find a place that truly feels like home.
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