Downsizing Your Home: How to Finance the Move

Why Downsizing Usually Requires Finance

Most people assume selling a larger home and buying a smaller one means no loan is necessary. That assumption holds only if you're willing to wait months between settlement dates, rent temporarily, or accept the property you can buy with cash at auction. In reality, timing mismatches between sales and purchases mean accessing bridging finance or structuring a new home loan becomes part of almost every downsizing move.

Consider a couple selling a four-bedroom family home in Manning for around $1.2 million and purchasing a two-bedroom apartment near the foreshore for $650,000. Even with substantial equity, the settlement on their sale might fall three weeks after they need to complete their purchase. That gap requires either a bridging loan to cover the shortfall or a new owner occupied home loan that can be partially repaid once the sale completes. Both options involve loan applications, valuations, and interest rate considerations.

What Happens to Your Borrowing Capacity When You Downsize

Your borrowing capacity typically reduces as you approach or enter retirement because lenders assess your ability to service a loan based on current and projected income. If you're transitioning from full-time work to part-time employment or relying on superannuation income, the amount you can borrow decreases regardless of the equity you hold.

Lenders calculate serviceability using your verifiable income, usually requiring at least two years of continued employment or a clear superannuation income stream. Someone aged 62 who plans to retire at 65 might find their loan application declined or limited to a shorter term, even when purchasing a property worth half their current home's value. This calculation affects whether you need to contribute more of your sale proceeds to the purchase or accept a variable rate with higher repayments to meet serviceability requirements within a compressed loan term.

The Offset Account Strategy That Preserves Flexibility

Retaining a home loan with a linked offset account after downsizing allows you to park the surplus equity from your sale while maintaining access and reducing interest costs. The loan balance might be $300,000 on your new apartment, but with $400,000 sitting in an offset account, you pay interest only on the net position while keeping those funds available for aged care costs, medical expenses, or helping family members.

This approach works particularly well for downsizers in South Perth who want to retain liquidity without locking funds into term deposits or managed investments. The offset account reduces the interest payable to nearly zero if your balance exceeds your loan amount, while preserving the option to withdraw funds without breaking a fixed term or triggering capital gains. When comparing home loan options, the offset feature becomes more valuable than a lower advertised rate if you're holding significant cash reserves.

How Age Affects Your Home Loan Application

Lenders impose maximum age limits at loan maturity, typically between 70 and 80 years depending on the institution. A borrower aged 65 applying for a 30-year loan will face rejection unless they can demonstrate income continuing well into their seventies or agree to a shorter loan term with correspondingly higher repayments.

The practical effect means choosing between a 10-year principal and interest loan with higher monthly costs or an interest only loan that requires either refinancing or full repayment at the end of the interest-only period. Some lenders will extend terms for borrowers with substantial superannuation balances, but this requires detailed documentation and often results in reduced loan amounts. In our experience, downsizers who start their home loan application process before retiring have substantially more options than those who wait until after their employment ends.

The LVR Consideration When Buying a Smaller Property

Your loan to value ratio determines whether you pay Lenders Mortgage Insurance and affects the interest rate discount you receive. Downsizers often assume their substantial equity automatically qualifies them for the lowest rates, but lenders price loans based on the LVR of the new purchase, not your equity from the previous property.

Purchasing an apartment for $650,000 with a $200,000 loan gives you an LVR of approximately 31 percent, which positions you well for rate discounts and avoids LMI. However, if settlement timing forces you to borrow $500,000 temporarily before your sale completes, your LVR jumps to 77 percent, potentially triggering insurance costs and reducing your rate discount. Coordinating settlement dates or arranging pre-approval with funds held in offset addresses this gap and preserves your pricing advantage.

Refinancing After Your Sale Settles

Many downsizers initially borrow more than they need to bridge the settlement gap, then reduce their loan substantially once their sale proceeds arrive. Refinancing to a lower loan amount doesn't typically require a full loan application if you're staying with the same lender, but switching lenders to access lower variable home loan rates does.

The decision depends on whether the rate saving justifies the application effort and any discharge fees from your current lender. Someone holding a $150,000 loan at a variable interest rate 0.5 percent above current market rates might save around $750 annually by refinancing. Over a remaining loan term of seven years, that compounds to several thousand dollars, but if you're planning to repay the loan within two years, the saving rarely justifies the time and potential costs involved.

Planning Your Finance Before Listing Your Property

Starting your loan conversations months before listing gives you certainty about how much you can spend and what loan structure works for your circumstances. This includes understanding whether your income will support borrowing capacity at the time of purchase, what deposit you'll need to avoid higher rates, and whether your target property type presents any valuation or lending restrictions.

Apartments in South Perth with high investor ratios or units in smaller complexes sometimes face lender restrictions that reduce your options or require higher deposits. Discovering this limitation after signing a purchase contract leaves you scrambling for alternative lenders or renegotiating terms. Securing pre-approval with a clear understanding of property criteria means you can make purchase decisions with confidence and settle on timeframes that suit your circumstances.

Call one of our team or book an appointment at a time that works for you to discuss how your downsizing move can be structured to preserve flexibility and minimise loan costs.

Frequently Asked Questions