Hi there. In this personal finance and real-estate themed post, I would like to talk about the benefits of downsizing. The contents in this post is based on a recent experience on moving to a slightly smaller family home in a more desired location along with materials from the internet.
Yes there are downsides with dealing with a smaller living space but there are benefits with a smaller space from a financial perspective.
Note Do make finance and investing decisions at your own risk. It is recommended to do a bit of research on real-estate basics and the financial markets.
References:
If you look at housing size only a smaller house in much more affordable compared to a larger house. One of the biggest factors in housing prices is the size of the property or the amount of square feet. In general, larger properties are desirable as there is more living space.
There does come a point where the size of a property could be too big to the point where the price would be too high. A larger house leads to larger mortgage payments and debt. With larger houses, you may run into unused space that would be needed to be filled with furniture.
Smaller houses are more affordable based on their listing prices. There is less furniture and stuff needed to fill a smaller space. There is no real need for a large kitchen if you do not really cook. There is no real need for three large sofas when only one of them is used.
Don't quote me on this but I would think that smaller houses would be less in demand. There would be less competition for smaller houses. You don't have to go as extreme as finding tiny houses but you can find smaller houses that have enough space for everyday tasks. Although it is not a focus in this post, be aware that a small house in a super desirable area can still be expensive despite the size.
Something that should not be overlooked are utility bills such as electricity, gas, water and waste. The costs from utility bills are not as big as mortgage amounts but they do add up over the months. Utility bill amounts do scale with the size of the residential property. Utility bill amounts do typically increase with larger homes. Smaller houses would be associated with smaller utility bills in general.
I have watched a fair bit of real estate listing shows such as Property Brothers, Love It or List It and House Hunters. It seems that these shows and even people are in awe of big houses with nice furnishings. If you really think about it, you have to think about the amount of cleaning and maintenance involved to make such a big home still look nice. My family wanted to move to a smaller place as my parents are getting old. They don't want to clean so much and do so much grass cutting on the lawn and in the backyard of the old house. Downsizing was an option for less maintenance and for a cheaper house in the Toronto and surrounding area.
Smaller places are much easier to clean as there is less space which makes cleaning faster. There is no need to hire a cleaner. Cleaning can be done more often in smaller spaces. Clean spaces does look more inviting for the home owners and for the guests.
Mortgage amounts are subjected to compound interest. Interest is applied to the amount that is owed on the mortgage. The interest would be added on to the already owed mortgage. This makes it such that you would owe more money if no payments have been made. Making regular payments is needed in order to pay off the accumulated compounded interest and the principal mortgage amount.
You could do the minimum amount of these mortgage payments but it is better to make larger payments to pay off the interest and the mortgage amount faster. Even with current low interest rates, compound interest on a loan/mortgage is NOT your friend. You do not want a scenario where the interest compounds to a point where the accumulated interest grows faster than the income earned.
The takeaway here is that going with a smaller and less expensive house is associated with a smaller mortgage amount. It is easier to pay off the debt on a smaller place versus having a larger mortgage on a more expensive house.
I could add some math here on compound interest but I'll add this link instead if you would like the math details.
Thank you for reading.
