Downsizing Your Home: Avoid These Loan Mistakes

Most downsizers assume that buying a smaller, less expensive property automatically means borrowing less and paying less interest. That assumption can create problems if your income has dropped since retirement or if you're planning to access super for the purchase.

Downsizing in East Perth often means moving from a three-bedroom house on Wellington Street or one of the larger blocks closer to Queens Gardens into a two-bedroom apartment near the Claisebrook Village precinct or a townhouse in the newer developments along Royal Street. The property might cost less, but lenders assess serviceability based on your current income and commitments, not the sale price of your previous home.

How Lenders Assess Your Income After Retirement

Lenders calculate your borrowing capacity using your current income, not the equity from your property sale. If you've retired or reduced work hours, your income might not support the loan amount you expect, even if you're downsizing to a property that costs $200,000 less than the home you're selling.

Consider a buyer who sold a renovated character home near Hyde Park for $950,000 and wanted to purchase a two-bedroom apartment in the Claisebrook precinct for $650,000. They had $400,000 in equity after settling the sale but planned to borrow $250,000 to keep cash available for renovations and living expenses. Their household income had dropped from $110,000 to $65,000 after one partner retired. Despite the substantial deposit, the lender's serviceability assessment flagged the loan as marginal due to the reduced income, and they needed to increase the deposit to $450,000 to secure approval.

Should You Use Super or Equity for the Deposit?

You can access your superannuation under the downsizer contribution scheme if you're 55 or older and selling a property you've owned for at least ten years. Up to $300,000 per person can be withdrawn without affecting your contribution caps, but once the money leaves super, it's no longer earning concessionally taxed returns.

Using equity from your property sale instead of super keeps your retirement savings invested and growing. A home loan with a smaller loan amount and a linked offset account gives you flexibility to park sale proceeds while keeping them accessible. You can pay down the loan over time without locking all your cash into the property upfront.

Fixed or Variable Rates When You're Retired

A variable rate gives you unlimited extra repayments and full redraw, which suits downsizers who want to pay off the loan quickly using proceeds from their previous sale. A fixed rate locks in your repayment amount, which can help with budgeting on a fixed income, but limits how much you can repay early without triggering break costs.

Split loans let you fix part of the loan for budget certainty and keep the rest variable for flexibility. If you're planning to make lump sum repayments from your property sale or super, keep the majority variable to avoid restrictions.

Interest Only Repayments and Cash Flow

Interest only repayments reduce your monthly outgoings and can suit retirees who want to preserve cash flow, but they don't reduce your loan balance. If your goal is to own the property outright within a few years, principal and interest repayments build equity faster.

Some downsizers prefer interest only for the first year or two while they settle into retirement, then switch to principal and interest once they've adjusted their budget. This approach keeps monthly commitments lower initially without extending the loan term unnecessarily.

How an Offset Account Helps Downsizers

An offset account linked to your home loan reduces the interest you're charged without locking your funds into the loan. If you're selling a property and waiting to deploy cash for renovations, travel, or other expenses, the offset account keeps your money accessible while saving you interest daily.

For a $300,000 loan with $150,000 sitting in the offset account, you're only charged interest on $150,000. That's a tangible saving without committing to a fixed repayment strategy before you've finalised your retirement budget.

Stamp Duty and Pensioner Concessions in Western Australia

Western Australia offers a pensioner duty concession if you're eligible for the Commonwealth Seniors Health Card or certain Centrelink payments. The concession applies to properties up to $750,000 and can reduce transfer duty significantly, but you must be receiving the relevant payment at the time of settlement.

If you're not yet eligible for a pension but expect to be within a year, consider the timing of your purchase. Settling after you've commenced pension payments can mean a saving of several thousand dollars on transfer duty. Your mortgage broker in East Perth can help you model different settlement timelines to see whether the timing makes a material difference.

Avoiding Lenders Mortgage Insurance When Downsizing

Lenders Mortgage Insurance is typically charged when your loan to value ratio exceeds 80%, but downsizers with substantial equity from their previous sale rarely need to borrow more than 80% of the purchase price. If you're borrowing $400,000 to buy a $650,000 apartment, your LVR is around 62%, so LMI doesn't apply.

Some lenders offer discounted rates or waive certain fees for borrowers with an LVR below 70%. If your deposit allows you to borrow less than 70% of the property value, ask your broker to compare lenders based on rate discounts and fee structures rather than selecting a lender based solely on the standard variable rate.

What to Check Before Applying

Before you apply for a loan, confirm your current income with recent payslips, tax returns, or Centrelink statements if you're receiving pension payments. Lenders need to verify your income, and missing documents can delay your home loan application or pre-approval.

If you're selling your current property and the sale hasn't settled, ask your broker about conditional approval based on the expected sale proceeds. Some lenders will assess your application using the contract of sale as evidence of your deposit, which speeds up the approval process and lets you make an offer on your new property with confidence.

Downsizing should reduce your financial commitments, not create new ones. Call one of our team or book an appointment at a time that works for you to discuss your options and make sure your loan structure supports your retirement plans.

Frequently Asked Questions