For many New Zealanders, their home is their largest asset. As retirement approaches, downsizing from the family home to something smaller can free up capital, reduce maintenance burdens, and simplify life. But it is not a decision to make lightly.
This guide explores the financial and practical considerations of downsizing in retirement.
Why People Downsize
The motivations for downsizing typically fall into several categories.
Financial reasons drive many decisions. Selling a larger home and buying something smaller releases equity that can supplement retirement income. A couple moving from a $1.2 million family home to an $800,000 apartment might free up $400,000 (less transaction costs) to invest or spend.
Practical reasons matter too. A large family home designed for raising children can feel overwhelming once the children leave. Maintaining gardens, cleaning multiple bathrooms, and heating unused rooms become burdens rather than pleasures. A smaller home means less work and lower running costs.
Lifestyle changes often prompt the move. Some people want to be closer to amenities, healthcare, or family. Others seek the security of a retirement village or apartment complex. Some want to move to a warmer climate or a location better suited to their retirement activities.
Health considerations may eventually force the issue. Stairs become difficult. Gardens become unmanageable. Being close to medical facilities becomes important. Planning ahead allows you to make the move on your terms rather than in crisis.
The Financial Reality
The numbers rarely work out quite as hoped. Transaction costs consume a significant portion of the equity you release.
Selling costs typically run to 3-4% of the sale price, including real estate commission, legal fees, and marketing. On a $1.2 million sale, that might be $40,000-50,000.
Buying costs add another 1-2% of the purchase price, including legal fees, inspections, and moving costs. On an $800,000 purchase, expect $10,000-15,000 in costs.
Between selling and buying, $50,000-65,000 might disappear in transaction costs. Your $400,000 equity release becomes $335,000-350,000 in usable funds.
Stamp duty does not exist in New Zealand (unlike Australia), which helps. But if you are buying into a retirement village, entrance fees and deferred management fees can consume substantial portions of your equity.
Retirement Villages: A Special Case
Retirement villages offer purpose-built accommodation with various levels of care available as needs change. They can provide community, security, and peace of mind. But the financial structures are complex and vary significantly between operators.
Most villages use a licence-to-occupy model rather than freehold ownership. You pay an entrance fee (often close to market value for the unit) plus ongoing weekly fees. When you leave or pass away, the operator retains a deferred management fee, typically 20-30% of either your entry price or the resale value.
This means your estate receives significantly less than the unit's value. A unit purchased for $600,000 might return only $420,000-480,000 after deferred fees, even if values have increased.
Some villages offer different structures with lower deferred fees but higher weekly charges. Understanding exactly what you are buying, what you can leave to your estate, and what ongoing costs apply is essential before committing.
The Retirement Villages Association provides resources for understanding village contracts, and independent legal advice is strongly recommended before signing.
Tax Implications
Selling your family home is generally tax-free in New Zealand since the main home exemption excludes your primary residence from the bright-line test. However, there are situations where tax could apply.
If you have used part of your home for business or rental purposes, that portion may not be fully exempt. If you have bought and sold multiple homes in recent years, the IRD may question whether you are trading in property.
For most retirees downsizing their long-term family home, tax is not a concern. But if your situation is complicated, seek advice before selling.
The proceeds from downsizing, once invested, may generate taxable income. Interest, dividends, and some fund returns are taxable. This is a different kind of tax consideration, but worth factoring into your planning.
Where to Move?
Location decisions in retirement involve different trade-offs than earlier in life.
Proximity to family often matters more. Being near children and grandchildren provides social connection and potential support as you age. But families move, so building your entire plan around current family locations carries risk.
Access to healthcare becomes increasingly important. Being close to a good hospital and medical facilities provides peace of mind and practical benefits if health issues arise.
Community and social opportunities matter for wellbeing. Moving to a location where you know nobody can be isolating. Consider how you will build social connections in a new area.
Climate and lifestyle preferences are personal. Some retirees head north for warmth. Others prioritise being near the coast, the mountains, or cultural amenities. What do you actually want to do with your retirement years?
Affordability varies dramatically by location. The same money buys very different properties in Auckland versus the regions. Moving to a lower-cost area can release more equity while potentially providing a better lifestyle.
The Emotional Dimension
Downsizing is not just a financial transaction. Leaving a home where you raised your family, where memories live in every room, is emotionally significant.
Give yourself time to process the decision. Rushed moves often lead to regret. If possible, start the conversation years before you need to act.
Involve family appropriately. Your children may have opinions about the family home, but ultimately the decision is yours. Their preferences should not override your needs.
Plan for belongings. Decades of accumulated possessions cannot all fit into a smaller home. Sorting, donating, and disposing of items takes time and emotional energy. Many people underestimate how long and difficult this process is.
Consider a trial. Some people rent out their home and trial living in a smaller property or different location before committing. This is more complex but can prevent expensive mistakes.
Timing the Move
When to downsize involves competing considerations.
Moving while you are healthy and active gives you more options and makes the transition easier. You can manage the move yourself, adapt to new surroundings, and build a social network in your new location.
Waiting preserves optionality. Property values might increase. Your preferences might change. You might decide you do not want to move at all.
Market conditions matter but are unpredictable. Trying to time the property market perfectly is futile. If downsizing makes sense for your life, the exact timing of sale and purchase is less important than getting the overall strategy right.
Health can change quickly. People who wait too long sometimes find they cannot move when they want to, or must move in crisis rather than by choice. A fall or health event can trigger an unwanted move to a care facility rather than a planned transition to a retirement-friendly home.
Alternatives to Moving
Downsizing is not the only option for accessing home equity or reducing housing burdens.
Renovating your current home to be more age-friendly (single-level living, accessible bathroom, lower maintenance garden) may cost less than moving and allow you to stay in familiar surroundings.
Renting out part of your home can generate income without moving. A teenager might appreciate a separate flat while attending university. An international student might value homestay accommodation.
Home equity release products (reverse mortgages) allow you to access some equity while staying in your home. These products have significant costs and risks, but suit some situations. They are covered in our separate article on using home equity in retirement.
Staying put and simply spending less is sometimes the right answer. If your attachment to your home is strong and your income needs are modest, forcing a move for financial reasons may not be necessary.
Making the Decision
Downsizing works best when it aligns with both your financial needs and your life preferences. Moving purely for financial reasons to a location or property type you do not actually want rarely ends well.
Start by clarifying your priorities. What do you want your retirement to look like? Where do you want to live? What matters most to you in a home?
Then run the numbers carefully. How much equity will you actually release after costs? What will the ongoing costs be in your new situation? How does this affect your retirement income plan?
Finally, give yourself time. Unless circumstances force a quick decision, taking months or even years to plan a move typically leads to better outcomes than rushing.
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