Why Should You Downsize Your Home in Melbourne?

Why Downsizing Your Home Makes Financial Sense

Downsizing means selling your current home and purchasing a smaller or lower-value property. You reduce your housing costs, free up equity tied in your property, and may eliminate or substantially reduce your home loan. Consider a couple in their late 50s living in a four-bedroom house in Kew. The property is worth roughly the suburb's current median, but they only use two bedrooms. They sell, purchase a two-bedroom apartment in South Yarra, and walk away with several hundred thousand dollars in equity after clearing their remaining loan. That equity can go into super, offset accounts, or other investments. The new property costs less to maintain, and their ongoing home loan repayments drop by more than half.

You Can Reduce Your Loan Amount and Interest Costs

A smaller purchase price usually means a smaller loan. If you have equity from your current property, you may not need to borrow at all. Even if you do need finance, the loan amount will likely be lower than your existing debt. A lower loan means lower interest charges over time. You may also qualify for a lower variable rate or fixed rate depending on your loan to value ratio. When you borrow less than 80% of the property value, lenders often offer better pricing and you avoid paying LMI on the new loan. In our experience, clients who downsize and clear their existing debt often find themselves in a position to pay off the new loan within a few years, or to hold the funds in an offset account and maintain full flexibility.

The Property You Choose Affects Your Loan Options

The type of property you purchase will influence which lenders are willing to provide finance and at what rate. Apartments in high-density buildings, particularly those above 20 storeys or with a high percentage of non-owner-occupiers, may attract higher interest rates or lower maximum LVRs from some lenders. Older units or properties with small land content may be treated differently by lenders compared to freehold houses. If you are downsizing to a unit in South Melbourne or Richmond, it is worth understanding how your chosen property is classified by lenders before you make an offer. A broker can help you identify which lenders will provide the most suitable home loan options based on the property type and your financial position.

Downsizing Can Improve Your Borrowing Capacity for Other Goals

When you reduce or eliminate your home loan, your borrowing capacity for other purposes increases. If you want to help adult children enter the property market, invest in a second property, or fund a business, having less debt against your home makes it much easier to access finance. Lenders assess your capacity based on your income, existing debts, and living expenses. A lower home loan repayment means more income is available to service new debt. Even if you do not plan to borrow again, having the capacity available gives you options if circumstances change.

You May Still Need a Home Loan When Downsizing

Not everyone who downsizes can purchase outright. If you still have a mortgage on your current property, or if you want to retain some of your equity for other purposes, you will need to apply for a new home loan on the property you are buying. The application process is the same as any other purchase. You will need to provide proof of income, details of your assets and liabilities, and meet the lender's serviceability criteria. If you are retired or semi-retired and no longer earning a regular salary, some lenders will assess your application using superannuation drawdowns, investment income, or the equity position in the new property. A home loan pre-approval can give you confidence about your budget before you sell your current home.

Stamp Duty and Settlement Timing Matter

When you sell and buy at the same time, timing matters. If you settle the sale of your current home before you settle the purchase of your new home, you will have access to your proceeds and can use them toward the new property. If the purchase settles first, you may need bridging finance to cover the gap. Bridging finance allows you to purchase before you sell, but it comes with higher interest rates and fees. Stamp duty is also payable on the new property unless you qualify for a concession. In Victoria, first home buyers receive a stamp duty exemption on properties up to $600,000 and a concession up to $750,000, but downsizers who have owned property before do not qualify. Make sure you budget for stamp duty, conveyancing, and any other settlement costs when you calculate how much equity you will have left after downsizing.

Offset Accounts and Loan Features Still Apply

If you take out a new loan when downsizing, the same loan features are available. An offset account linked to your loan can reduce the interest you pay without locking funds away. If you have substantial equity left over after your purchase, keeping it in an offset account rather than paying down the loan in full gives you access to those funds if you need them. You can also choose between a variable rate, fixed rate, or split loan structure depending on your preference. Many downsizers prefer a variable loan with offset and redraw facilities because it offers flexibility and allows them to pay off the loan faster if they choose.

Refinancing Your Current Loan Before Downsizing May Not Be Necessary

Some people wonder whether they should refinance their current loan before they sell. In most cases, refinancing before downsizing does not provide much benefit. You will be selling the property and clearing the loan within a few months, so the effort and cost of refinancing may not be worthwhile. If you are not planning to sell for another year or more, refinancing to a lower rate or better loan structure can reduce your repayments in the meantime. A loan health check can help you decide whether refinancing now or waiting until after you downsize makes more sense for your situation.

Call one of our team or book an appointment at a time that works for you. We can help you understand your home loan options when downsizing and structure your finance to support your goals.

Frequently Asked Questions