Thinking of making a sea change or tree change? The rules have changed … for the better!
COVID-19 has shown many Australians that the way we work, live and play will change forever. Suddenly, the concept of ‘having’ to live in a big city is no longer a must. Real estate agents in major capital cities and regional areas are all reporting an influx of queries about selling the home in the big smoke and buying a house with land in a regional area to plant some veggies and run some chickens. Domain coined this the ‘COVID-Change’.
If you are thinking of making the move, here are some quick tips:
It’s a big move. Rent first then buy
The idea of tree-lined hills with views of the ocean from your loungeroom is very appealing. However, after growing up or living in a big city for many years or all your life, many people who are thinking of a tree-sea-COVID change may overlook the importance of social networks and family connections.
When advising clients about making such a move I have always suggested to rent for 12 months first in the area you want to move to whilst you lease out your current home in the big city. This will give you time to truly assess if such a tree-sea-COVID-change is right for you. Yes, the commute to work may be shorter. However, the ‘commute’ to shops, friends, family and a good cappuccino may take longer.
If after 12 months the move feels right – then proceed with selling your home in the big city. By this time you will also know the local housing market you are living in and be able to gauge what is a good buy for a new home to live in.
Over 65? Lived in your current home for more than 10 years?
In 2018 the game changed for people ‘downsizing’ their home.
If you:
- Are aged over 65; and,
- Owned your home for +10 years; and,
- Have lived in this home as your primary place of residence,
You may make a downsizer contribution of up to $300,000 to your superannuation fund. This is available for each individual. The downsizer contribution does not count towards your non-concessional contribution cap or total super balance. It can be a handy strategy to move the capital gains tax fee proceeds from your home sale into superannuation which may offer tax free earnings in retirement. There are a few details around this strategy so make sure you get advice from a financial planner or accountant before selling your home. Importantly, some key documents need to be signed within 90 days of your property sale settlement to take advantage of this strategy,
Buying and selling property is costly
As a rough rule of thumb, selling a property can cost between 2% to 3% in real estate agent fees, marketing costs and legal expenses. For a $1,000,000 home sale you can budget around $30,000 in fees.
Then, when you buy a new home, there is stamp duty, legal fees, mortgage fees if you are still borrowing for a home loan and incidental costs.
A $750,000 new home purchase will incur stamp duty of around $29,183 in NSW, $26,775 in Queensland and a whopping $40,070 if you have the honour of buying in Victoria. You can add a further $2,500 to $5,000 in legal fees and potential home loan application fees in addition to stamp duty.
In summary, the sale of a $1,000,000 home and the purchase of a $750,000 home may set you back around $65,000-$75,000 in fees and taxes. That does not include the cost of your removalist either … and your multiple trips to Bunnings!
There is great merit in reducing your home loan
The opportunity of a sea-tree-COVID-change that reduces your non-deductible home mortgage can be good for both your budget and your well-being (everyone likes the idea of a smaller mortgage).
For every $100,000 you owe to the bank on your home loan, assuming a 4.5% interest rate, you would expect to pay around $172,000 back to the bank in principle and interest repayments. Wait – there is more. A home mortgage is paid with ‘after-tax’ money. Based on the third highest marginal tax rate of 32.5% you will need to earn around $260,000 pre-tax to pay back that $100,000 currently owed to the bank on your home loan.
The opportunity of using proceeds from a sea-tree-COVID-change to reduce $100,000 of non-deductible mortgage debt effectively saves you the need to earn $260,000.
There are many considerations before making a big lifestyle and financial decision like moving home. Make sure you have a good team of advisers helping you such as your financial adviser, accountant and mortgage broker. Make sure they are all working together too when they are helping you. The right advice can set you up for both a great lifestyle and financial outcome.
Sources
Downsizing contributions into superannuation
COVID-change: It’s the new tree-change or sea-change for city dwellers
Andrew Zbik
Senior Financial Planner
Creation Wealth
0422 038 253
andrew.zbik@creationwealth.com.au
www.creationwealth.com.au