Beginner's Guide to Downsizing Your Home

Downsizing usually means selling a larger home and buying a smaller one, often to release equity or reduce maintenance.

The financing side gets overlooked until someone realises their current loan won't transfer, or that borrowing capacity has changed since they last applied. A loan structure that worked for a family home in your 40s might not suit a downsizer property in your 60s, particularly if your income has shifted from full-time salary to part pension and part investment returns.

What Changes When You Apply for a Loan to Downsize

Lenders assess borrowing capacity based on your current income, not the equity you're bringing from the sale. If you've retired or reduced your hours, your serviceability may be lower than it was when you bought your previous home. Consider someone moving from a four-bedroom house in Mount Eliza to a two-bedroom unit closer to the village. They might have $600,000 in equity from the sale, but if their assessable income has dropped to $55,000 per year combining the age pension and superannuation drawdowns, the lender will calculate how much they can borrow using that figure, not the equity amount.

This is where loan structure becomes important. A smaller loan amount over a shorter term may suit someone with lower income but significant equity. Alternatively, splitting the loan between a modest principal-and-interest portion and a smaller interest-only portion can reduce the required repayments during serviceability assessment, provided the interest-only term aligns with the borrower's plans.

How Offset Accounts Work When You're Holding Sale Proceeds

An offset account linked to your new home loan lets you park sale proceeds and reduce the interest charged without locking the funds into the loan itself. If you're waiting to finalise renovations, gift money to family, or simply want liquidity while you settle into the new property, an offset keeps those funds accessible while cutting the interest cost day by day.

Some lenders offer full offset on variable rate loans but only partial offset on fixed rate products, so the loan structure you choose affects how much you can save. In our experience, downsizers who plan to hold a large cash buffer often benefit more from a variable rate loan with a linked offset than from fixing a rate without full offset capability.

Should You Fix, Stay Variable, or Split the Rate

Fixed rates provide repayment certainty, which appeals to retirees on a predictable income. Variable rates offer flexibility and typically come with offset accounts and the ability to make extra repayments without penalty. A split loan lets you lock in part of the loan and keep part of it flexible, so you're not choosing one or the other outright.

Consider a downsizer in Mount Eliza purchasing a villa for $750,000 with a $150,000 loan after selling their family home. Fixing the full amount means they know exactly what they'll pay each fortnight, but they lose the ability to offset any surplus cash and may face break costs if they repay early. Keeping the loan variable means they can use an offset account and repay without penalty, but the rate can move. Splitting $100,000 fixed and $50,000 variable gives them some certainty and some flexibility, and the variable portion can be offset if they're holding funds from the sale temporarily.

Portable Loans and What Happens If You Move Again

A portable loan allows you to transfer your existing loan to a new property without refinancing, which can save on discharge fees, application fees, and valuation costs. Not all lenders offer portability, and even those that do may reassess your borrowing capacity or adjust your rate when you move the loan across.

If you're downsizing but think you might move again in a few years, whether to a retirement village or closer to family, portability can reduce the cost and paperwork involved in that next move. It's worth checking the terms before you settle, particularly if you're fixing part of the loan, since portability and fixed rates don't always align neatly depending on the lender.

The Timing Between Selling and Buying

Most downsizers sell first and buy second, which means they avoid bridging finance but need somewhere to live in between. If you're buying before you sell, a bridging loan covers the gap, but it's a short-term product with higher interest rates and strict timeframes. The lender will also assess whether you can service both loans simultaneously, even if only for a few months.

Selling first gives you certainty on the equity available and removes the pressure of carrying two properties, but it may mean a temporary rental period. Buying first lets you move once, but it adds cost and complexity to the loan application. The timing you choose affects which loan structure will work and how much the transition will cost.

Loan Features That Matter More When You're Downsizing

Redraw facilities let you pull back extra repayments if you need access to cash, but they're not the same as an offset account. A redraw is at the lender's discretion and may involve delays or fees, while an offset account is a separate transaction account you control. For someone downsizing with surplus equity, an offset typically offers more control.

Some lenders also allow additional repayments up to a set limit without penalty, even on fixed rate loans. If you're planning to pay down the loan quickly using sale proceeds, check the annual repayment cap and any fees that apply if you exceed it. These features often get skipped in the comparison process, but they can save thousands depending on how you manage the loan after settlement.

Call one of our team or book an appointment at a time that works for you. We'll help you compare home loan options that match the way you're planning to use your equity and structure the loan around your current income and goals.

Frequently Asked Questions