In the midst of the booming real estate market in Canada (mainly in Vancouver and Toronto), many Canadians are entertaining the idea of downsizing in order to sell their homes at a high value and purchase a smaller home or condo at a lower price.
Is downsizing the way to go? What are the costs associated with downsizing? The truth is, there are many costs to downsizing, and not all of them are obvious.
Canadians have many reasons to downsize. They include:
• Less house to upkeep
• Move closer to loved ones
• Spending the winter in a warmer place, therefore they don’t live in their home year round
• Getting equity out of their home to help fund retirement
Costs to sell your home
But let’s break down the more obvious costs of downsizing so that you can weigh the financial pros and cons. Keep in mind that the example below is for illustration purposes only. There may be other expenses not mentioned, but the key expenses are highlighted.
Let’s use the example of a home that will sell for $1,000,000 which is the approximate average cost of a detached home in Toronto. The home still carries a $200,000 mortgage, which would equate to a net amount of $800,000. However, there are costs that you must deduct from the total sale that can eat into your lump sum.
• Realtor commission (between 1%-7% depending on where you live in the country and what you are able to negotiate). In Toronto, the standard realtor rate is 5%. In this example of a $1,000,000 home, you would need to pay the realtor $50,000.
• Closing costs and legal fees – Approximately $1,500
• Miscellaneous costs – $1000
• This leaves you with approximately $747,500
• And an approximate cost of selling your home at $52,500
In addition to these reasons, these are some other costs that are associated with downsizing:
• The cost to fix up your home for the sale – Fresh coat of paint, minor repairs, kitchen/bathroom renovations, roof repairs and maybe even the cost to stage the home.
• The cost to part with old furniture – When you downsize, you typically have to get rid of furniture, books and other items that take up space. You may even decide to keep the items in a storage unit, which can cost money monthly (a typical 50 square foot unit can range from $125-$200/month plus HST, a mandatory monthly insurance premium and a set-up fee or refundable deposit)
Costs to buy your downsized home
There are also costs associated with buying your new downsized home. If you intend to purchase a smaller home (semi-detached, townhouse or condo), most of the money you earn from the sale of your home will go towards the purchase of your new downsized home. Here is an example of the expenses you may incur when you purchase your downsized home:
Let’s use the example of a condo with a cost of $500,000 which is the average cost of a condo in Toronto.
• Land transfer tax in Ontario for a $500,000 property is $6,475. Find out the land transfer tax in your province by visiting your local government website on land transfer taxes. For Ontario, visit the Government of Ontario land transfer tax page.
• There may be a Municipal Land Transfer Tax (MLTT) in addition to the provincial land transfer tax. For instance, in Toronto, the MLTT for a $500,000 condo would be $5,725. Visit your local municipality website to find out the calculation for your MLTT.
• Title insurance and legal fees – Approximately $1,500
• Moving costs – Approximately $2,000
• There may be a property tax adjustment – This would depend on when the seller paid the property taxes and when the buyer takes possession of the condo. In most cases, the buyer will have to pay the seller the difference depending on when they took possession of the property. If the seller is behind on payments, then the municipality requires that the seller pays off the taxes from the proceeds of the sale.
• Purchase of new furniture to fit smaller condo – Approximately $10,000 – $15,000
• Monthly maintenance fee for condo living – Approximately $500/month or $6,000/year
• This leaves you with approximately $221,800 from the sale of your $1,000,000 home before you deduct the cost of condo maintenance fees at $6,000/year.
• And the additional cost to purchase your downsized home at $25,700
• The total cost of downsizing from a $1 million home to a $500,000 condo would cost approximately $84,200 in your first year alone.
Although you sold your $1,000,000 home and downsized to a $500,000 condo, with all of the added expenses, you would only take home just over $215,800 after your first-year maintenance fees. This is the reality of downsizing. It isn’t as clear cut as the selling value of your home minus the buying cost of your downsized home. Although there is a return, the process of buying and selling has the added costs that can make or break your decision to move.
If you are downsizing because you need extra cash to help you with your retirement, an alternative is the CHIP Reverse Mortgage. With a reverse mortgage, you can stay in your home and still have the extra cash to help you with your retirement. To find out how much money you can get with a reverse mortgage, talk to your Dominion Lending Centre mortgage specialist today or if you decide to downsize, talk to your mortgage broker or a lawyer to find out your true cost of downsizing before making the final decision.