Traditionally downsizing was often associated with an empty nest, when it seemed no longer practical to live in a home that catered for a large family. Today, downsizing decisions are generally based on affordability, and not just of the home loan but all the costs associated with a property such as maintenance and the ever-increasing utility and municipal costs.
“Where affordability starts to become an issue, the question of a potential downsize comes into play,” says Alex Redl, Manager: Risk Management at Absa Home Loans. “The moment that thought is a consideration, homeowners should be alert that sooner, rather than later, is crucial if they are not to be impacted by arrears or deterioration of the home’s value. And this all starts with an intense focus on a budget, one which must be detailed enough to be able to determine how that budget will look in the immediate future.
Budget, budget, budget
“The budget is clear evidence of how rising costs impact on property affordability. In some cases, the affordability factor isn’t even related to loss of a job or source of income, it can simply be that the cost of inflation, and the previously mentioned increases in utility and rates services, and even groceries, are now draining financial resources.”
If it is clear that the current home is unaffordable, the most imperative first step is to ensure that the home loan account does not slip into arrears. Redl explains why: “Firstly this could impair the credit record of the customer and impact the ability to acquire bond finance for a downsized property. Secondly, home loan arrears tend to make the seller more desperate in terms of falling even further into arrears, resulting in the property not being able to be marketed for a sufficient period to achieve the desired asking price. This gives further weight to the statement of selling sooner rather than later.”
When the decision is made, the budget has to be revised again to account for a downsized home, and fortunately, Absa provides an affordability tool, which can be accessed on its website www.absa.co.za. To calculate the costs associated with mortgage finance may be quickly evident, however, Redl warns that there are some hidden costs that homeowners fail to factor in when weighing up decisions.
“Selling a property normally involves the services of an estate agent who charges a commission for the sale based on the selling price. Although this commission can be negotiated, be aware that it is normally exclusive of VAT. Also, there are clearance certificate requirements (ECC) and associated amounts that have to be paid in advance.”
Buying a property also comes with a range of allied costs such as conveyancing fees, transfer duties if applicable, municipal account deposits, and costs of relocation. “You need to compare the costs you are paying on your current property to the potential new property before you can determine the selling price, and only then can you determine what you can afford to buy in making such a move,” says Redl.
Sell or buy first?
Most people, advises Redl, need the funds from the sale of their current property to assist with the purchase of a new one, so it is recommended that putting your house on the market whilst you source the new property is a sound solution, especially given that you can acquire the new property based on conditions placed on the sale of the existing one. “The timeframe to sell homes is unpredictable, but nobody wants to be in a situation of having sold and having to move out before new accommodation has been found. Nor do you want to have bought a new property that is transferred into your name before your current property has been sold. Such double costs can hurt financially.”
In a sell-to-buy scenario such as downsizing, Redl recommends using one agent because they understand the time frames of settling a sale and those associated with a new purchase. “Also, if you are dealing with an agency, you can tap into its extensive branch network to source homes in new suburbs or areas.
“The agent selected should also have a good understanding of the area in which you are selling, with marketing systems already in place, and who also has access to statistical data that indicates selling prices for that suburb. One further piece of advice relative to agents is to make sure they work for the commission; you need continuous feedback on the selling process, with regards to activity on websites, views of your property, etc. and ensure all offers are presented,” says Redl.