The idea of a dream home holds different meanings for everyone. It can either be a big luxurious house or a small cosy place with all necessary amenities. Usually, the choice of your home is based on your affordability, and your family requirements. While an aged individual with fewer working years looks for a smaller, low-maintenance house, a younger person may look for higher square footage, driven by the need to accommodate a growing family or even peer pressure. However, a job loss, divorce, drop in income or any other economic reason has the potential to turn your large house into a liability. Owning a house thus is not just an investment, but it is also a recurring lifestyle expense, which demands financial attention all the time. In such a situation, you can explore the idea of downsizing your home.
As the idea suggests, downsizing means transitioning to something smaller. In this article, we look at how downsizing your home can make financial sense.
What Is Downsizing Home?
Home downsizing means shifting to a smaller home. Sometimes people purchase a property bigger than their family’s requirements. Over time, the property may become difficult to manage and financially stressful. Some retirees opt for downsizing when their children move out or when their incomes are too small to maintain large properties.
Financial Benefits Of Downsizing
By downsizing, you can use savings from your bigger home towards the achievement of your high-priority financial goals. For example, a retiree would find it hard to maintain a big house and may also find mobility in a big house challenging. Selling the big house and shifting to a smaller one will help them find much-needed liquidity in retirement.
You will find savings in the resources and energy required to make a smaller home functionable. A smaller home will also require lesser furnishing. Your utility bills, housekeeping charges and maintenance will also be lower.
If you have bought the house on a home loan, switching to a smaller home would lower your EMIs as a smaller house would cost less than a bigger house, depending on the location. You can also use the money saved while selling the bigger house to prepay your loan and remain debt-free.
Your savings can be parked in various investment instruments earmarked for achieving various financial goals.
One of the crucial benefits of downsizing is that it helps you regain the borrowing capacity that was earlier suppressed due to the bigger housing loan.
You can also enjoy tax benefits available on small-sized homes. Most banks provide home loans at lower interest rates for affordable housing schemes.
Things to keep in mind when going for a home downsizing
Downsizing your home may prove to be a financially liberating process, but it is a difficult one as you would go through a myriad of emotions before letting your dream home go. It is thus important to prepare yourself emotionally before taking the call and keep some crucial pointers in mind:
– Before the downsizing, check the prices of real estate in the area where you want to shift. Usually, old properties are located closer to the city centre, and they have easy access to physical and social infrastructure. When looking for a smaller home, focus on a similar location, and go for the area which is close to your workplace.
– Don’t neglect the tax impact on your sale proceeding. If you are planning to sell the property after completion of two years from the date of possession, it will be subject to long term capital gain tax with 20% indexation benefit. If you sell it before two years, it is taxed at your applicable slab rate.
– Verify the total cost of owning the smaller home, such as interest rate, processing fee, etc. Check the quality of construction, security, and neighbours before you finalise the deal. Talk to your bank about the intention to sell the existing property and buying a smaller one. Understand the bank’s terms and conditions.
– Focus on finalizing the deal to sell your existing property. Confirm your purchase for a new abode only after you get a final confirmation from the buyer. Buy a ready-to-move-in property to ensure immediate possession.
Downsizing can be a very useful financial tool to save money. You must assess your requirements as per family size before making the final decision for a home.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.