Downsizing your home to rightsize your life.

Downsizing your home is generally considered a milestone reserved for our golden years - when our little birds have fled the nest, and our family home has twice as many toilets as it has people.

But as the cost of living has ticked up in recent years, more younger Canadian homeowners have opted to shrink their living style in favour of a smaller mortgage, smaller footprint and, if all goes to plan, much larger cash flow. Let’s take a look at what a change in living arrangements could do for you

Bigger isn’t always better.

For many young Canadian homeowners who’ve achieved their homeownership goals in the past several years, sitting in their dream homes hasn’t necessarily been the joy they’d expected. As mortgage rates skyrocketed last year alongside the costs of virtually everything else, owning the perfect 2000-square-foot single-family detached home in the city of your dreams may have started to feel like more of a financial headache than it’s worth.

This is largely why, in most major cities, we have seen a large movement of young people from larger-footprint, single-family homes to smaller, more affordable options. A recent StatsCan survey found that 44% of respondents aged 25-34 felt forced to make more affordable housing options, including choosing a more affordable house. For Canadians aged 15 to 24, that figure was 33%.

Of course, when we think of selling your home and downsizing, we tend to think of retirees who are able to sell their fully paid-off homes and walk away with hundreds of thousands of dollars of cash in their pockets to live out their golden years. So what is the benefit of downsizing for younger homeowners with less equity in their homes? Given the high average equity most Canadian homeowners hold right now, despite prices correcting over the past year, you might be surprised how much power you hold to shift your financial future for the better.

Cash flow makes all the difference*

take a look at a very average Canadian example. Say Bryan and Shannon purchased in the last 5 years, their home is currently valued at $700,000, and they have a mortgage balance of $500,000. For the purposes of the example, we can assume that their payment is about $2900 per month and that (like most average Canadians) they carry about $25,000 in consumer debt each. On top of that, let’s say they’re also financing a new car that costs roughly $1000 monthly with about $35,000 left outstanding. Add all this to the cost of everything from gas to groceries, and their monthly bill, like most of ours, are really starting to add up.

But let’s look at the one big, shiny positive here: our friends here also hold about $200,000 in equity, which can set them on a whole new financial trajectory when leveraged wisely.

So Shannon and Bryan decide they want to downsize - shrink their footprint, consolidate their physical belongings into a more freeing, minimal collection and, perhaps most importantly, free themselves from some of the financial burden each month. They hit the pavement in the summer market and find the perfect townhome for $500,000 and put the minimum $25,000 down - no problem after they sold their home for $750,000 (thanks, competitive summer market). With the extra roughly $200,000 (after realtor fees, closing costs etc), they are able to pay out their $50,000 in collective consumer debt and their car loan in full - leaving them with a mortgage payment of about $2700 (at 4.44%, 5-year fixed), saving them thousands each month in debt repayment obligation, and leaving them with about $100,000 cash in the bank to save and invest for a rainy day.

*But it’s also not everything.

And sure, the freedom of cash flow will make a huge difference to Shannon and Bryan’s lives and ease the mental burden of carrying debt stress month to month. But they will also reap the benefits of the more pared-back way of living that so many of us crave!

A lateral move for upward growth

Downsizing sounds excellent on paper, but of course, moving into a smaller space after becoming used to where you live is not for everyone. This is where the lesser-known term “rightsizing” comes in. In economics, “rightsizing” refers to optimizing performance to meet business objectives rather than cutting labour costs during economic hardship. For homeowners, it can mean a lateral move to another home of a similar size but including the addition of an income-generating suite within the property. This allows homeowners to continue to hold an asset of comparable value but cancel out some of the burdens of home ownership costs via rental income.

Rightsizing can look very similar to downsizing in that you will sell your current home, access the equity you hold and leverage it to make a down payment on the next property with the income suite you’ll need to offset some of your costs.

When you sell your current home for a lateral move, you’ll also be able to take advantage of equity to pay off current outstanding debt facilities, much like if you were to downsize, as well as free up the cash for the down payment on your next property. Remember that if you are purchasing an owner-occupied rental property, you can put down as little s 5% on the first $500,000 and 10% on the rest of the purchase price up to $999,999.

The power of equity remains

The moral of the story here is that despite the doom and gloom of the previous year about home prices taking a nose dive, the average Canadian homeowner still holds a great deal of equity. Even if your purchase was within the last several years, you are likely sitting on more than enough equity to make a move, change your lifestyle, and free up some considerable cash flow each month.

Even if a move isn’t in the cards for you right now, leveraging the equity you’ve got to erase debt obligations and adjust your monthly burden could make a huge difference for you and your family. If you, like most of us, are spending the end of each month tallying how you’ll make all the numbers work in the next, then it’s time to chat. Remember that as mortgage professionals, we’re not just here for when you want to buy a home. We are here to guide you through your financial growth and well-being, no matter what that looks like for you!

Head to the link below to schedule a no-obligation chat or to ask any questions you may have about making your equity work for you this summer.