Don't downsize your finances just to move to a smaller home
'Right-sizing' has its pros for some older homeowners but it can be a tricky move, writes John Cradden
Whether you prefer to call it downsizing or the more fashionable term 'right-sizing', the idea of moving from a large home to a smaller home as you approach your senior years seems like a simple one, but it can be a tricky move to make and it is not without its financial risks.
There's certainly a lot of interest in downsizing among those, particularly within government circles, who are seeking creative solutions to the tightness of supply in the property market. There looks likely to be some moves to create financial incentives to older homeowners to trade down from large 'empty-nest' homes, and in doing so free up supply of larger properties for young families.
Research by the ESRI from 2016 showed that it was rare for older people to move house, and that a high proportion of older couples - just over 30pc - lived in homes with seven or more rooms. This makes Ireland one of the empty-nest capitals of Europe, particularly compared with places like Italy and Greece.
However, there a fine line between incentivising older people to free up their family homes and pressurising them to do so.
Nonetheless, many of these homeowners won't need financial incentives to make such a move - just as long as they can find a smaller home that suits them.
A survey by a Dublin-based investment firm Lotus Investments revealed that 74pc of retirees would consider moving to a smaller home, but only if certain desires were satisfied, such as a garden or room to entertain family and friends. The survey of 1,000 adults conducted by iReach also showed, unsurprisingly, that people are keen to remain in the same area.
So what should you know before you begin exploring the possibility? In particular, what might be the positive and negative effects on your finances?
The obvious pros of moving to a smaller home include the cost savings in heating, electricity, insurance, etc. Furthermore, if you live in an older property, moving to a more modern one will mean less time and money on maintenance.
Your home (your principal private residence) can also be sold without incurring any capital gains tax. And in so doing you can free up equity without having to take on a loan or extend a mortgage, and which can then be invested to supplement your pension income.
Property tax is increasing next year. It has been frozen since 2013, since when many Dublin homes have doubled in value. Moving out means this fixed bill will be significantly reduced.
If you are buying a new home (or even a buy-to-let if you have cash left over from the sale of your old home), you are at an advantage over other bidders because you will most likely be a cash buyer.
Income tax is payable on any rental income, of course, but over-65s don't begin to pay tax until they earn €18,000 (€36,000 for a couple).
However, becoming a landlord is not an attractive option for many at the moment, according to property expert and author Carol Tallon. "Every week I am meeting people of all ages who have vacant homes, but will not consider renting them out," she said.
Furthermore, there are a range of financial reasons not to downsize, according to John McCartney, director of research at estate agents Savills.
"If you have an expectation that house prices are going to rise, that's a financial incentive not to do it," he said. "For example, if you've got a million euro house and you have an expectation that house prices are going to rise by 10pc per annum, that's €100,000 tax-free that you're turning your nose up at it if you sell it."
The Fair Deal scheme is another issue, particularly if one half of a couple needs to go into a nursing home but the other stays at home.
Under the scheme, 3.75pc of the value of all liquid assets must be contributed to the cost of the nursing home each year for as long as the resident is alive, plus 3.75pc of the market value of the family home - but only for the first three years, and which is only due for payment once the house is sold because, until then, it's an 'illiquid' asset.
But if the partner who remains at home decides to sell and downsize to a smaller home, then the three-year cap would no longer apply as the cash left over from the sale of the original home becomes a liquid asset. So the couple would have to pay 3.75pc of the value of the downsized home as well as 3.75pc of their liquid assets every year towards the cost of nursing home care for as long as the resident is alive.
Then there are lots of other, more practical considerations, too, he added. "You might have adult children living at home. You might have grandchildren that want to come around for a roast dinner on a Sunday," said McCartney.
"You may have a Chesterfield suite that won't fit in anywhere that you can find, or you may find that in your neighbourhood, say you're living in Dalkey or Sandycove or somewhere like that, you want to stay in the area but nobody has been building suitable stock that would appeal to you and that would accommodate the furniture that you've accumulated.
"So, to me, there's a whole raft of practical obstacles to it, but that doesn't mean it can't happen."
Tallon, who has worked with couples who have downsized in the past, says that the dysfunction in the property market doesn't mean downsizing isn't an option, but there is scope for more creative solutions.
"It's worth pointing out that there is quite a bit of unused and underused space in and around our established neighbourhoods," she said. "In the past, these were not considered suitable for planning but there has been a change in recent years. The number one priority for downsizers ought to be remaining within their community."
She points to an initiative by architect Darragh Lynch, who managed to get six neighbours in Malahide with vacant plots in their back gardens to join forces and obtain planning permission for six mews houses. One of the neighbours had previously applied for permission on his own but was refused, but by working with Lynch and five other interested neighbours, they managed to get this project over the line and, of course, benefit financially.
Another option is Ava Housing, a scheme for older homeowners who want to reconfigure their large family homes to better suit their needs but also to create a rental unit within it.
It's suitable for those who might consider utilising the Revenue's Rent-A-Room scheme, through which you can earn rental income up to €14,000 per annum tax free, but who might feel that their home isn't suitable or see it as too much of a risk. The retrofit cost would typically be around €50,000 but the organisation would work with the homeowner to offset that with grants and the rental income.
Another option here is Elder Home Share, a platform that connects older people with potential housemates.
For those who have made their mind up to right-size, even if that means moving to a different area, a new property search website might well make things a bit easier in the hunt for that elusive smaller property that ticks all the required boxes.
Perfectproperty.ie tags properties based on who they are most suitable for. "In the case of downsizers, it's often about move-in-ready properties that are low maintenance," says CEO Laura Pollard.
She adds that would-be downsizers are up against strong competition for properties under the €350,000 mark because getting a mortgage is becoming more difficult. "It's where first-time buyers, investors and down-sizers all compete for similar properties."
Includes information on Rent-a-Room scheme and the Fair Deal nursing home scheme, both of which may be of interest to would-be downsizers.
Pioneering scheme that helps older homeowners to reconfigure large family homes to better suit their needs, and also to add rental capacity in order to qualify under the Rent-a-Room scheme.
New property search website that allows you to search property more accurately, according to how it will suit your particular needs and wants.
Platform that matches up those people who are now looking to find rental accommodation with older homeowners who are now on the look out for a suitable housemate.
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