Pitfalls of downsizing

Recent media coverage of retirement village giant Aveo has highlighted how important it is to think, take advice and think again before moving out of the family home into other accommodation.

There are three main ways of downsizing and each has drawbacks. Moving into a unit in a retirement village is what the spotlight has been on recently, but moving into a land lease community/residential park or even a strata-titled apartment can also be problematic. Here are the main issues.

The central question is: what happens if you want to or need to move?

If you live in a retirement village, you will find that generally you have to pay an exit fee set as a percentage of the purchase price. In the case of Aveo, exit fees can be as high as 35 or 40 per cent. It would be very hard to buy anywhere else, if you lost more than a third of your home equity. This means that in most cases you can't afford to leave.

There are also other recurring fees and charges in a retirement village. Before you decide to move into a retirement village you must make sure that you can afford them, not only now but over time.

Land lease communities and residential parks, can also have exit fees, set as a percentage of the capital gain. The same problem arises as in trying to move out of a retirement village: you lose home equity and you may not be able to afford to buy anywhere else.

In addition, you will be paying rent on the plot on which your home sits. You have very limited control over how much rent is charged and a person may find themselves unable to pay the rent once their partner no longer is living there. Leases can also be terminated and this has happened in cases were parks were sold to be redeveloped.

Then there are strata-titled apartments and townhouses. Quite apart from the lack of control over strata fees, NSW strata schemes can now be sold if 75 per cent of owners agree. That used to be 100 per cent.

The best way to downsize remains to buy a smaller, Torrens-titled house which of course is easier said than done.