Top tips to downsize your home with the right loan

Downsizing releases equity that can reshape your finances, but how you structure the loan on your next property determines whether you maximise that benefit or give it back through higher interest costs and inflexible terms.

Melbourne's established suburbs see regular downsizer activity. Empty nesters in Chadstone or Mount Waverley often sell larger family homes and purchase smaller properties closer to shops, medical services, and public transport. The sale might clear $800,000 to $1,200,000, with the replacement property costing $600,000 to $900,000. What happens to the difference depends on whether you borrow at all, how much you borrow, and how that borrowing is structured.

Should you borrow when downsizing or buy outright?

Buying outright removes ongoing repayments and interest costs entirely. If you sell for $950,000 and purchase for $650,000, you walk away with $300,000 in liquid funds after costs. No loan means no interest rate risk, no serviceability assessments, and no monthly commitment.

Borrowing a portion and keeping more cash offers flexibility. Consider someone downsizing from a four-bedroom home in Glen Waverley to a two-bedroom unit in Clayton. The sale proceeds are $880,000, the replacement property costs $620,000, and settlement costs total roughly $25,000. Instead of paying cash, they take out a $200,000 loan and retain $485,000 after covering the purchase, settlement, and establishing the loan. That retained capital can be directed toward aged care bonds, income-producing assets, or held as a buffer for health expenses. The loan repayment at current variable rates sits around $1,100 to $1,300 per month on a principal and interest structure, depending on the term and lender.

Whether borrowing makes sense depends on your income, access to the age pension, and how you intend to use the freed-up capital. Centrelink's assets test treats home equity differently to financial assets, so holding more cash can reduce pension entitlements. That trade-off should be modelled before you settle on a loan amount.

How lenders assess borrowing capacity for downsizers

Serviceability is calculated on your current income, not the equity you hold. If you're retired or semi-retired, lenders assess pension income, superannuation drawdowns, dividends, and rental income. APRA requires all lenders to test your capacity to service the loan at an interest rate 3.0 percentage points above the actual product rate, so a loan advertised at 6.2% is assessed at 9.2%.

In our experience, downsizers with part-time work, a modest super balance, and the age pension can still qualify for lending, but the amount approved will be lower than it would have been during their working years. If your household income is $55,000 per year from combined sources, borrowing capacity typically falls between $180,000 and $280,000 depending on other commitments, the loan term, and the lender's policy. Choosing a lender with flexible income treatment, especially around superannuation and investment income, can make the difference between approval and decline.

Fixed, variable, or split: which structure fits downsizing?

A variable rate gives you full offset access and no restrictions on extra repayments. If you're holding a large cash buffer from the sale, linking that buffer to a mortgage offset account means you only pay interest on the net loan balance. On a $250,000 loan with $150,000 sitting in offset, you're charged interest on $100,000. The full $250,000 remains accessible, and the interest saving is identical to making a $150,000 prepayment without locking that cash inside the loan.

Fixed rates provide repayment certainty but remove offset functionality with most lenders and limit prepayments to around $10,000 to $30,000 per year depending on the product. If you want to make large lump sum reductions or you're holding significant offset funds, a fixed rate removes those benefits.

A split loan allows you to fix a portion for rate certainty and keep a portion variable for flexibility. For someone downsizing who wants predictable repayments on half the loan and full access to offset on the other half, splitting $200,000 into $100,000 fixed and $100,000 variable with offset delivers both. You can read more about how different loan structures work and when each one makes sense.

Loan term and repayment type: principal and interest vs interest-only

Shorter loan terms mean higher repayments but lower total interest. A $200,000 loan over 10 years at 6.3% costs roughly $2,250 per month, compared to around $1,200 per month over 30 years. You'll pay $70,000 in interest over 10 years versus $232,000 over 30 years, assuming rates stay constant.

If your income comfortably covers the higher repayment and you want to clear the debt before accessing aged care or passing the property to your estate, a shorter term makes sense. If cashflow is limited or you want to preserve liquid assets, extending the term and making extra repayments when able keeps your minimum commitment low.

Interest-only repayments reduce the monthly cost further but don't reduce the loan balance. They can be useful if you're waiting on the sale of another asset, managing a temporary income gap, or prioritising cash preservation in the early years of retirement. Most lenders offer interest-only periods of up to five years on owner-occupied loans. After that period, the loan reverts to principal and interest and the repayment increases.

Refinancing your existing loan when you downsize

If you have a mortgage on your current home, selling and buying simultaneously means discharging that loan and taking out a new one. Some borrowers assume they can port the existing loan to the new property, but portability depends on the lender, the loan product, and whether the new property meets their security requirements.

In most cases, you'll discharge the old loan on settlement of the sale and apply for a new loan to settle the purchase. If you're selling in Chadstone and buying in Mulgrave, the sale might settle four weeks after the purchase. You'll need bridging finance or a deposit hold strategy to manage the timing gap. Your broker can structure the sequence so you're not holding two mortgaged properties or scrambling for short-term funds. More detail on switching loans and timing considerations can be found on our refinancing page.

Stamp duty, capital gains tax, and government concessions

Victoria does not charge stamp duty on your principal place of residence sale, and no capital gains tax applies to the sale of your main home under Australian tax law. You will pay stamp duty on the property you purchase.

For an established home in Melbourne valued at $680,000, stamp duty is roughly $35,000. For a property at $750,000, duty is approximately $40,000. No Victorian concession applies to downsizers purchasing established homes. The first home buyer duty exemption and concession apply only to buyers who have not previously owned property in Australia.

If you're purchasing a new apartment or townhouse off the plan, the off-the-plan duty concession that applied to contracts signed on or before 31 October 2026 provided a discount calculated on land value only at the contract date. That concession has now ended. Downsizers purchasing new builds after that date pay duty on the full dutiable value.

Offset accounts and how much cash to hold in them

Every dollar in your offset account reduces the balance on which interest is charged. If you borrow $180,000 and keep $80,000 in offset, you pay interest on $100,000. The $80,000 remains fully accessible and continues to earn the equivalent of the loan rate in interest savings, which is typically higher than any transaction account or term deposit rate after tax.

Offset balances do not reduce your repayment amount. The minimum monthly repayment stays the same, but more of that repayment goes toward reducing the principal and less goes toward interest. Over time, the loan clears faster and total interest paid drops.

If you're weighing up whether to put $100,000 into offset or into a term deposit at 4.5%, the offset saves you interest at your loan rate, say 6.3%, while the term deposit earns 4.5% before tax. For someone on a marginal tax rate of 32.5%, the after-tax return on the term deposit is roughly 3.0%. The offset delivers a higher effective return and keeps the funds accessible without notice periods or break fees.

Choosing the right lender when borrowing capacity is moderate

Not all lenders treat retirement income the same way. Some will accept 100% of pension income, others accept only a percentage. Some lenders allow you to include a portion of your superannuation balance as notional income, others rely only on the declared drawdown amount.

If you're applying with $48,000 annual income from the age pension and a super drawdown, one lender might assess your capacity at $210,000 while another approves $280,000. Product features matter too, particularly offset availability, redraw conditions, and prepayment limits. A loan that allows unlimited extra repayments and full offset access will generally be more useful than one with a slightly lower rate but restrictive features.

Working with a broker who maintains current knowledge of each lender's serviceability policy and product structure means your application goes to the lender most likely to approve the amount you need with the features you'll actually use. You can learn more about how we work with clients across Melbourne and the lenders we access.

What happens to your loan if you move into aged care later

If you move into aged care and your home is sold or rented, the loan needs to be managed. Selling the property clears the debt. Renting it out converts the loan from owner-occupied to investment, which may trigger a rate increase of 0.4% to 0.7% depending on the lender. Some lenders require you to refinance or reapply when the occupancy status changes.

If you're considering aged care within the next five to ten years, keeping the loan balance low and the term short reduces the chance that a remaining debt complicates your aged care funding. Aged care accommodation bonds and daily care fees are means-tested, and holding a mortgage reduces your assessable assets, but it also reduces your liquid capital available to pay the bond. Planning the loan structure now with that possibility in mind avoids forced refinancing or property sales later.

Call one of our team or book an appointment at a time that works for you. We'll model your borrowing options, compare lender policies, and structure a loan that supports the next stage without locking away the equity you've worked years to build.

Frequently Asked Questions