Top Strategies to Downsize Your Home with the Right Loan

Downsizing and Home Loan Structure: What Changes

When you sell a larger property and buy a smaller one, the loan you need changes in size, but the features that protect your financial position matter just as much. Downsizers often move from a property with little or no debt to a new purchase that might be entirely cash-funded, partially funded, or structured to preserve capital for other purposes.

Consider a buyer in South Perth who sold a four-bedroom family home in Manning and purchased a two-bedroom apartment near the river. The sale netted $950,000 after paying out an existing mortgage. The new apartment cost $680,000. Rather than paying cash in full, they borrowed $400,000 on a variable rate with a linked offset account and deposited $280,000 of the remaining proceeds into that offset. The loan sat at zero net interest cost while the deposited funds remained accessible for medical expenses, travel, and eventual estate planning. The structure provided liquidity without locking capital into the property.

That scenario reflects a broader principle. Downsizing does not always mean eliminating debt. It can mean reshaping debt to preserve flexibility and access to funds at a stage of life when income may be fixed or declining.

Portability: Can You Transfer Your Existing Loan?

Some lenders allow you to transfer an existing loan to a new property without reapplying or paying discharge fees. Portability is particularly useful if you hold a fixed rate below current market levels or a discounted variable rate tied to a package you want to keep.

Not all home loans are portable. Lenders who offer this feature typically require the new property to be purchased within a set window after selling the old one, often 90 to 180 days. The loan amount may need to stay the same or reduce. If you are borrowing more to fund the new purchase, portability usually does not apply, and a new application will be required.

In our experience, buyers overlook portability until after they have signed a discharge authority. If you are moving to a lower-value property and your current loan sits below what you owe, check whether your lender supports portability before listing your existing home for sale.

Using an Offset Account to Hold Sale Proceeds

An offset account linked to your new home loan allows you to deposit surplus funds from the sale of your previous property and reduce interest charges without losing access to that capital. The balance in the offset is deducted from the loan balance when calculating interest, so a $400,000 loan with $280,000 in the offset only accrues interest on $120,000.

This structure works well for downsizers who want to keep funds available for aged care contributions, helping family members, or discretionary spending. The funds remain in your name and can be withdrawn at any time without refinancing or applying for redraw approval.

Not every loan product includes an offset account. Some lenders charge a higher interest rate or an annual package fee to access this feature. Compare the cost of the offset-enabled loan against the interest saved. If you are holding a substantial balance in the offset for the long term, the structure usually pays for itself within the first year.

Fixed Rate, Variable Rate, or Split: Which Suits Downsizers?

A variable rate gives you the flexibility to make unlimited extra repayments and access redraw or offset features without penalty. A fixed rate locks your repayment amount for a set term, which can help with budgeting if you are on a fixed income, but limits your ability to pay down the loan early or access surplus funds.

A split structure combines both. You might fix half the loan to stabilise part of your repayment and keep the other half on a variable rate with an offset account attached. This approach is common among downsizers who want some certainty around repayments but also want to retain access to surplus capital from the sale.

As an example, a buyer purchasing a townhouse in Como after selling a larger property in Mount Pleasant borrowed $350,000 as a split loan: $175,000 fixed for three years and $175,000 variable with offset. The fixed portion gave them a predictable repayment for the medium term. The variable portion allowed them to deposit $150,000 from the sale proceeds and reduce the effective loan balance to $25,000 while keeping those funds accessible.

Borrowing Capacity and Income Changes in Retirement

Lenders assess your ability to service a loan based on your current income, even if the loan amount is modest relative to the property value. If you are retired or semi-retired, your income may come from a combination of superannuation drawdowns, the Age Pension, rental income, or part-time work. Not all income types are treated equally.

Superannuation income is generally accepted by lenders if it is being drawn as a regular account-based pension. Lump sum withdrawals do not count as ongoing income. The Age Pension is accepted by most lenders, though some apply a loading or reduction factor when calculating serviceability. Investment income and dividends are usually included, but franking credits are treated inconsistently across lenders.

If your income has dropped since you last applied for a loan, your borrowing capacity may be lower than expected, even if you are buying a less expensive property. A broker can identify lenders who apply serviceability policy suited to retirees and semi-retirees, particularly those who assess loans based on actual living expenses rather than the household expenditure measure used for younger borrowers.

Stamp Duty, CGT, and Other Costs When Downsizing

Stamp duty applies to the purchase of your new property in the same way it would for any other buyer. Concessions for first home buyers do not apply to downsizers. Some states have previously offered downsizer stamp duty concessions, but none are currently active under the legislation in force across Australian jurisdictions.

If your previous property was your principal place of residence for the entire period you owned it, no capital gains tax applies when you sell. If you rented it out or used it to produce income for part of the ownership period, a partial capital gain may be assessable. The main residence exemption is applied on a proportional basis depending on how long the property was your home.

Settlement costs, conveyancing fees, building and pest inspections, and removalist expenses should all be factored into your budget. These costs are not typically financed as part of the home loan and are paid from your available funds at settlement.

Interest-Only Loans for Downsizers: When They Apply

Interest-only repayments are less common for owner-occupiers but may be relevant if you are downsizing and want to minimise monthly outgoings while preserving capital. An interest-only period does not reduce the loan balance, so the principal remains owing at the end of the interest-only term.

This structure can be appropriate if you expect a future lump sum, such as the sale of an investment property, a superannuation payment, or an inheritance, and intend to pay down the loan in full at that time. It is not suitable if the goal is to eliminate debt steadily over time.

Lenders apply stricter serviceability requirements to interest-only loans for owner-occupiers and may require a lower loan-to-value ratio. Most interest-only terms are capped at five years, after which the loan reverts to principal and interest repayments unless you apply to extend the interest-only period.

Refinancing After You Downsize

If you have already purchased your new property and used cash or an existing loan, refinancing lets you restructure the debt and access features you may not have prioritised at the time of purchase. You might refinance to add an offset account, move to a lower interest rate, or consolidate other debts such as car loans or credit cards into the mortgage.

Refinancing also applies if your circumstances have changed since settlement. A reduction in income, a change in household size, or a shift in your financial priorities can all be reasons to revisit your loan structure. Lenders assess refinance applications using the same serviceability criteria as new loans, so income verification and living expense declarations are required.

Refinancing costs typically include application fees, valuation fees, and discharge fees from your current lender. Some lenders offer to cover these costs as part of a refinance package, though the rebate may be conditional on maintaining the loan for a minimum period, usually two years.

Call one of our team or book an appointment at a time that works for you to discuss how your loan structure can be tailored to your downsizing plans.

Frequently Asked Questions