Smart ways to approach downsizing your home

Downsizing usually means you're buying a property for less than what you're selling, which should leave you with cash in hand and a smaller loan or no loan at all.

The decision most people face is whether to pay off the mortgage entirely, keep some debt for flexibility, or redirect that money elsewhere. Getting the loan structure wrong can mean paying unnecessary interest, losing access to funds you might need, or missing out on better options that suit where you are now.

Should You Pay Off the Mortgage Completely When You Downsize?

Paying off your mortgage entirely when downsizing removes ongoing repayments and interest costs. Whether that's the right move depends on what you plan to do with your money and whether you might need to borrow again in the future.

Consider someone selling a home in Mount Lawley and purchasing a villa in a northern suburb. If the sale leaves them with enough to buy outright, they eliminate their repayments entirely and own the property from day one. That works well if they have other savings or income to cover living expenses and emergencies, and they're not planning to invest or help family members with property purchases down the track.

But if you pay everything off and then need to borrow again in a year or two, lenders will reassess your income and expenses from scratch. If you've retired or reduced your working hours by then, your borrowing capacity might be lower than it is right now, or you might not qualify at all. Keeping a small loan in place, even if you don't need it immediately, can preserve your ability to access funds later without reapplying.

Keeping a Loan in Place for Future Flexibility

A loan with an offset account lets you park your surplus cash while keeping the debt structure active. You're not paying interest on the portion offset, but the loan remains open and available if you need to draw on it.

In a scenario where you're downsizing to a unit in Cottesloe and you have $200,000 left over after the purchase, you could deposit that into an offset account linked to a variable rate home loan. The interest on your loan is calculated on the balance minus the offset amount, so if your loan is $200,000 and your offset holds $200,000, you're paying no interest at all. But the loan is still there, and if you decide to help a family member with a deposit or cover an unexpected cost, you can access those funds without going through a new application.

This approach works when you want to keep your options open and you're comfortable managing the loan account. It doesn't suit everyone, particularly if you prefer to close out debt entirely and simplify your finances. But for people who might need access to funds in the next few years and want to lock in their borrowing capacity while their income still supports it, it's worth considering.

Fixed Rate, Variable Rate, or Split When Downsizing

When you're taking out a new loan on a downsized property, the rate structure you choose should match how long you plan to stay and whether you want the option to pay off the loan early.

A variable rate gives you full flexibility to make extra repayments or pay off the loan entirely without break costs. If you're planning to sell again in a few years, or if you expect a lump sum from super or an investment, variable lets you act on that without penalty.

A fixed rate locks in your repayments for a set period, which can be useful if you're on a fixed income and want certainty. But if you decide to sell or pay off the loan early during the fixed period, you'll likely face break costs, which can run into thousands of dollars depending on how much rates have moved since you locked in.

A split loan lets you fix part of the loan for certainty and keep part variable for flexibility. In our experience, this works well for downsizers who want some protection against rate rises but also want the option to make extra repayments or access an offset account on the variable portion. The exact split depends on your situation, but a 50/50 or 60/40 split is common.

Using Equity from Your Sale Without Borrowing

If you're downsizing and you have enough equity to buy outright, you might still choose to take out a small loan to keep your credit file active and maintain a relationship with a lender. This can make it quicker to access finance later if needed, and some lenders offer better rates or features to existing customers.

Alternatively, you can buy outright and avoid any loan costs entirely. This suits people who are retiring fully, have enough savings and super to cover their living expenses, and don't anticipate needing to borrow again. It also removes the need to manage loan accounts, offset accounts, and annual reviews.

The decision comes down to whether you value access and flexibility over simplicity. If you're unsure, it's worth running the numbers on both options before you settle on the new property, because once the sale is complete and the funds are spent, it's much harder to access finance if your income has changed.

What Happens to Your Loan When You Sell Your Current Home

When you sell your current home, the proceeds from the sale are used to pay off your existing mortgage on settlement day. Your lender will provide a payout figure that includes the outstanding balance, any break costs if you're exiting a fixed rate early, and discharge fees.

If you're buying another property at the same time, you can arrange for a new loan to settle on the same day or shortly after, so the funds from your sale go toward the new purchase. If there's a gap between selling and buying, you'll need to account for where your money will sit in the meantime and whether that affects your loan application for the new property.

Some lenders offer portable loans, which means you can transfer your existing loan to a new property without discharging and reapplying. This can save on application fees and avoid break costs if you're on a fixed rate, but it's not available with all lenders and not always the most competitive option. It's worth comparing whether porting your loan or applying fresh with a different lender gives you a lower rate and the features you need.

Downsizing and Accessing Super or Other Funds

If you're over 60 and have reached preservation age, you can access your super as a lump sum or income stream, depending on your fund's rules and your employment status. Some people use super proceeds to fund part or all of their downsized property purchase, which reduces the loan amount or eliminates the need to borrow entirely.

The downsizer contribution scheme allows you to contribute up to $300,000 per person from the proceeds of selling your home into your super fund, even if you're over the usual contribution caps. You need to be 55 or older, and the home must have been owned for at least 10 years. This can be a useful way to boost your retirement savings, but it also means those funds are locked in super and subject to preservation rules, so you won't have access to that money until you meet a condition of release.

If you're planning to use super or make a downsizer contribution, talk to a financial planner or accountant before you settle the sale, because the timing and tax treatment can affect how much you end up with and what you can do with it.

Loan Features That Matter When You're Downsizing

When you're setting up a loan on a downsized property, the features that matter most are offset accounts, redraw facilities, and the ability to make extra repayments without penalty.

An offset account is usually the most flexible option because your money sits in a transaction account linked to the loan, and you can access it anytime without restrictions. The balance in the offset reduces the amount of interest you're charged, so if you have surplus cash from your sale, you can park it there and pay little or no interest while keeping full access.

A redraw facility lets you make extra repayments into the loan and then withdraw them later if needed. It's less flexible than an offset because the funds are held within the loan account, and some lenders impose limits on how much you can redraw or charge fees for accessing it. Redraw also doesn't help if you want to keep the funds separate for budgeting or emergencies.

If you're planning to pay off the loan quickly or you want the option to make lump sum repayments as money comes in, make sure the loan allows unlimited extra repayments without penalty. Not all fixed rate loans offer this, and some variable loans cap the amount you can prepay each year without triggering fees.

When you're downsizing, your loan should support the way you want to use your money, not create barriers or costs that make it harder to access what you've already paid in. Refinancing to a loan with the right features can save you money and give you more control, even if your current loan is with a lender you've been with for years.

Call one of our team or book an appointment at a time that works for you. We'll help you structure your loan to suit your next stage without overpaying or locking yourself into features you don't need.

Frequently Asked Questions