Downsizing your home: a practical guide

Downsizing your home means selling a larger property and moving to a smaller one, usually to free up money tied up in the house and to cut the cost and effort of running a big home. It is a common move in or near retirement, but the right time depends on your circumstances. This guide walks through what downsizing involves, the costs to weigh first, how the proceeds can affect your finances, and where a smaller home loan fits in, so you can plan the move with your eyes open. Figures here come from the Australian Securities and Investments Commission (ASIC) MoneySmart, and what applies to you depends on your circumstances and lender criteria, so treat the patterns below as the general rule rather than a promise. If you do end up borrowing on the new home, our overview of Home loans explains how the loan side works.

What downsizing your home actually means

Downsizing is the decision to sell a home that has become larger than you need and buy something smaller, easier to maintain, or better located for the next stage of life. ASIC MoneySmart frames it as a way to free up capital and reduce household running costs, which is why so many people think about it as the children move out or as maintenance becomes harder.

The appeal is straightforward. A smaller property can mean more money in your pocket, less upkeep, lower running costs, and a location closer to family, transport or services. ASIC MoneySmart also points to the other side of the ledger: less storage, less room for guests to stay, and the emotional pull of leaving a long held family home. Neither list settles the question on its own. Downsizing is as much a lifestyle decision as a financial one, and it pays to sit with both before you list the house.

The costs to weigh before you downsize

The headline number, the difference between what you sell for and what you buy, is rarely the full picture. Buying and selling in the same market carries real transaction costs, and ASIC MoneySmart lists the main ones to budget for.

• Real estate agent fees on the sale of your current home.
• Stamp duty on the property you buy.
• Legal and conveyancing fees on both the sale and the purchase.
• Furniture removal and moving costs.

If you move into a unit or apartment, ASIC MoneySmart notes there can also be ongoing strata or body corporate fees that a standalone house does not carry. These are easy to overlook because they are not a one off cost, but they change your monthly budget for as long as you live there.

Add these up before you assume downsizing will leave you with a large lump sum. In a tight gap between sale price and purchase price, transaction costs can take a meaningful bite, and that is worth knowing before you commit.

How the proceeds can affect your finances

Selling the family home can change more than your bank balance, especially if you receive a government payment. ASIC MoneySmart explains that while your home is your principal place of residence it is not counted in the Age Pension assets test. Once you sell, the picture shifts.

Two things matter here. First, money from the sale that you set aside to buy another home is generally exempt from the assets test for up to 12 months. Second, those proceeds can be included in deemed income, which may affect the amount of any government benefit you receive. The detail of how this applies depends on your situation, so ASIC MoneySmart recommends contacting Services Australia’s Financial Information Service to understand the impact on your payments before you act.

There is also a super angle worth knowing. ASIC MoneySmart says that if you are aged 55 or older you may be able to contribute up to 300,000 dollars from the sale of your home into your super as a downsizer super contribution. Whether you are eligible, and whether it suits your wider plan, depends on your circumstances, so it is worth confirming the current rules and getting advice before you rely on it.

Where a smaller home loan fits in

Many people picture downsizing as the end of a mortgage, and for some it is. For others, the sale clears the existing loan and a smaller new loan covers the gap, or the move happens well before retirement and a fresh loan is simply part of the plan. Either way, a smaller property usually means a smaller amount to finance, and that is the part Finance Lab can help you think through.

A smaller loan generally means smaller repayments, but the figure depends on the loan amount, the interest rate and the term. The clearest way to see what a new, smaller loan might cost is to model it. ASIC MoneySmart offers a mortgage calculator to estimate repayments, and trying a few scenarios before you buy helps you set a sensible purchase budget. Try the borrowing power calculator to see what a smaller loan after downsizing might look like.

If you do need a loan on the new home, your deposit and the amount you borrow set your loan-to-value ratio. ASIC MoneySmart defines the loan-to-value ratio (LVR) as the amount of a loan as a percentage of the value of the asset it was used to buy, calculated by dividing the loan amount by the value of the asset. For example, a 200,000 dollar loan on a 500,000 dollar home is a 40 percent LVR. Downsizers who carry a large share of the new purchase from the sale of the old home often land at a low LVR, which can widen the lender options open to them, though what you qualify for still depends on your circumstances and lender criteria. Our guide on What is lvr first home buyer explains how that ratio works in more detail.

A downsizing checklist

If you are weighing the move, a short checklist keeps the decision grounded in real numbers rather than a rough guess. These steps follow the order most people work through, and they line up with the professionals ASIC MoneySmart suggests you involve.

A few downsizing tips sit underneath that list. Start the cost estimate early, because it often changes the target price you should be shopping at. Be honest about the lifestyle trade-offs, not just the money. And do not treat the sale proceeds as a clear lump sum until the transaction costs are out.

Talk it through with the team at Finance Lab

Downsizing is a big move, and the home loan piece is only one part of it, but it is the part where a clear plan makes the rest easier. The team at Finance Lab can help you work out what a smaller loan might cost, how your deposit and LVR shape your options, and how the numbers fit the wider decision you are making. Reach out to the team at Finance Lab to talk it through.

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