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3 Things to Know About Downgrading Your Home to Fund Your Retirement

Photo: Candida Performa. Licence: https://creativecommons.org/licenses/by/2.0/

With rising health care costs, longer life expectancy and increasing costs of living in Singapore, retiring here has become an expensive affair. Many elderly couples in Singapore are “asset rich but cash poor”. Due to this, some retirees are choosing to downgrade their homes to fund their retirement.

However, before you decide that downgrading is a reliable retirement plan, I wish to point out three things that you should consider.

Hidden fees and costs

Calculating how much you can make by downgrading your home to a smaller unit is not as simple as taking the difference between the sale price and the cost of the new home. There are numerous additional fees and costs to include.

Firstly, there are agent fees for both buying and selling a property. This is usually around 1-2% of the price of the home. There are also property taxes and fees like the buyer stamp duty that you need to add to your calculations.

Furthermore, moving into a new home also means additional renovation costs and administrative fees, such as conveyance fees, that will eat into your freed up capital.

Moving house is a tedious affair

Selling your home is not as easy as it sounds. Let’s face it. It is not like you can simply put your home on sale on Lazada and find a buyer in the next few hours. Sometimes, homes can be placed on sale for months without a single offer being made. This can be extremely stressful and demoralising.

Also, finding the right home that suits your needs and meets your financial requirement is another hurdle to overcome. It is not as straightforward as saying, “I want to downgrade from a five-room to a three-room apartment”. There are numerous other considerations, such as suitability of location, the condition of the apartment and whether the apartment’s previous renovations suit your requirements.

Home prices may fluctuate

Singapore’s property market has dipped in the last few years due to the property cooling measures. As such, some retirees who downgraded at the wrong time may have ended up not freeing up much capital at all.

Buying during an overheated property market and selling when the price has come down can be extremely costly for those who are depending on the freed up capital to boost their retirement portfolio.

The Foolish bottom line

Downsizing your home can be a good way of freeing capital for your retirement. However, it is important to note that this retirement plan may not always go smoothly. The factors mentioned above are just some of the considerations.

In my opinion, downgrading your home should be left as a last resort that retirees should only consider if all else has failed. It is better to plan your retirement around other investments and savings rather than having to rely on capital tied up in your home.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.