Downsizer sale adds up for some, not all

Max Newnham

By

February 13, 2018

 

Not long after the downsizer superannuation contribution (DSC) legislation was passed, people started asking whether it made sense to sell a home purely to increase someone’s superannuation. As usual, there is no definitive answer that applies to every situation.

One point that cannot be debated is that where an individual or a couple have decided to sell their home to downsize, or because they are moving into an aged-care facility or retirement village, the ability to make a DSC is a great improvement on their options under the previous restrictions on super contributions.

Like all strategies, a great deal of analysis and many projections are required when considering whether to recommend a DSC strategy to clients.

When determining whether it makes sense to sell a home purely to make a DSC and increase the amount a client has in super, an adviser must compare this option with one of the few other alternatives available to retirees now – taking out a reverse mortgage.

One possible downside of selling a home to make a DSC is the costs of selling and purchasing. These costs must be taken into account but they must also be measured against the expense of a reverse mortgage.

Canstar Blue, a customer satisfaction research and ratings business, estimates that the total cost of repaying a $90,000 reverse mortgage loan, at a loan-to-value ratio (LVR) of 15 per cent, based on average interest rates and average fees paid, is $91,783 after 10 years, $259,431 after 20 years, and $572,131 after 30 years.

Selling costs for homes are, on average, between 2 per cent and 3 per cent of the sale value; purchase costs vary between states, but for properties under $1 million they are about 4.5 per cent. This means selling a home worth $1.5 million, and purchasing a replacement home that costs $900,000, results in a total cost of about $85,000.

If a reverse mortgage at 15 per cent LVR were taken out on a property worth $1.5 million, for a period of 20 years, the total interest and borrowing costs capitalised would amount to about $649,000. Comparing this with a DSC of $600,000, that earns an average income of 7.7 per cent, with an annual pension drawdown of 7 per cent, the superannuation would grow to about $689,000.

Another factor that should be calculated is the net effect of making a DSC on the amount of age pension that a client receives, or is entitled to receive. As a general rule, the more the assets test will affect a client, the less advantageous it is to sell a home purely to make a DSC. The following table shows that the net extra income after making a DSC varies, from $2702 up to $36,000.

 

$ $ $ $ $
Couple’s combined age pension now      34,819     34,819        33,298        17,698               –
Assets including super now    20,000  200,000      400,000      600,000      830,000
Downsizer contribution  600,000   600,000      600,000      600,000      600,000
Total assets after contribution  620,000   800,000  1,000,000   1,200,000   1,430,000
Extra super income at 6%    36,000     36,000        36,000        36,000        36,000
Less reduction in age pension under assets test      18,681     32,721        33,298        17,698                –
Net extra income after downsizer      17,319       3279          2702        18,302        36,000

 


TOPICS:   Downsizer superannuation contributions

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