The loan you take out for a smaller home should be planned before you list the family home, not after. Many downsizers have built up equity. The mistakes tend to come from timing and loan structure, not from the property itself.
Can You Still Get a Home Loan When You Downsize?
Yes, you can still apply for a home loan when you downsize, but the lender will assess your income, expenses and the loan amount you need, not only the equity you are bringing. A smaller purchase price does not remove the need for that assessment.
If you are close to retirement, lenders will also look at how you plan to repay the loan once your pay changes. Some lenders treat permanent government employment favourably, but each lender assesses income, expenses and loan size under its own policy, and it will want to see how the numbers work after you sell. A borrowing capacity calculator gives you a rough idea of where you stand before you speak to anyone.
If you are not sure how your sector's employment type is viewed, our page on home loans for public servants explains how lenders often look at government roles.
Buy First or Sell First: Which Order Suits Your Situation?
Selling first removes the risk of carrying two loans, while buying first gives you more choice and less pressure. Each path has a cost, so the right order depends on how much time and cash flow you can afford to give up.
If you sell first, you may need to rent or arrange a long settlement while you search. If you buy first, you may need short-term finance until the sale settles. A bridging loan can cover that gap, but interest is usually charged at a higher rate than a standard loan, and you carry the risk that your home takes longer to sell than planned.
Before you decide, it helps to know what your current home is likely to sell for. Knowing the likely sale price gives you a starting point, though it is not a formal valuation.
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Book a chat with a Finance and Mortgage Brokers at Public Home Loans today.
Downsizing Example: Using Sale Proceeds to Cut the Loan
Paying down the new loan with sale proceeds lowers your repayments, but it also uses up cash you may want to keep available. Keeping some of that cash in an offset account can give you a middle path.
Consider a public servant in their late fifties who sells their family home. They are buying a smaller place and expect to borrow $250,000 on a 25-year term. At an illustrative rate of 6.75% p.a., the monthly principal and interest repayment on $250,000 over 25 years is about $1,727.
The buyer then asks whether to use $50,000 of spare sale proceeds to cut the loan to $200,000. At the same illustrative rate and term, the repayment on $200,000 would be about $1,382, a drop of roughly $345 a month. The trade-off is that the $50,000 is no longer available for emergencies or a car purchase.
Instead, they keep the $50,000 in a linked offset account against the $250,000 loan. Interest is charged only on the balance after the offset is deducted, so on the interest side it works much like the smaller loan, while the cash stays accessible. The minimum repayment stays at about $1,727, but they can choose to pay more. The cost is that offset loans can carry a higher rate or an annual fee with some lenders, so the saving needs to be compared with that cost.
The outcome is a smaller loan balance in effect, with cash still on hand. If you want to see how a different structure compares, you can ask for a loan health check.
Variable, Fixed or Split Rate: What Suits a Downsizer?
A variable rate moves with the lender, a fixed rate stays the same for a set period, and a split rate does both. For a downsizer, the choice mostly comes down to whether you want flexibility to pay the loan off with sale proceeds or certainty over repayments.
Fixed rates can come with break costs if you repay early, which matters if you expect a lump sum from a sale or super. Variable loans usually allow extra repayments and offset accounts, but your repayment can rise if rates go up. A split loan lets you fix part of the debt and leave the rest variable, though the fixed portion still carries the break cost risk.
If an existing fixed period is about to end, the fixed rate expiry page explains what to check before you sell.
Interest Only or Principal and Interest When You Downsize?
Interest only repayments are lower in the short term, but you do not reduce the loan balance during that period. Principal and interest repayments cost more each month but pay the debt down.
Interest only periods on owner occupied loans are usually limited, commonly to a few years, and depend on each lender's policy. If you do use one, the repayments after it ends are calculated over a shorter remaining term, so they are higher than they would have been if you had paid principal from the start. For most downsizers who want a smaller, manageable loan, principal and interest is the more common route.
Lenders Mortgage Insurance and Deposit Schemes
Downsizers with substantial equity may not need lenders mortgage insurance, because it generally applies when you borrow more than 80% of the property value. If you are moving from a large mortgage and have limited sale proceeds, it is worth checking before you commit.
A small number of lenders waive or discount LMI for some professions, subject to each lender's policy, eligibility and loan-to-value limits. Our pages on LMI waivers for public servants and no LMI loans explain more. Waivers can come with other conditions, such as a higher rate or a limit on loan size, and a lower deposit means a larger loan and more interest over time.
Pre-Approval Before You List
Getting pre-approval before you list the home tells you what you can spend on the next one. It is a conditional indication from a lender, not a promise to lend, and it usually lapses after a set period.
Having it in place means you can act when the right property appears, and you avoid selling before you know your limit. See our guide to home loan pre-approval for how it works.
To talk through your own numbers with a broker who understands public sector employment, call one of our team or book an appointment at a time that works for you. We can compare lenders, structure the loan around your sale and help you move with a clear plan.
Frequently Asked Questions
Can I get a home loan when I downsize?
Yes. Lenders still assess your income, expenses and the loan amount you need. Some lenders treat permanent government employment favourably, but each lender assesses income, expenses and loan size under its own policy.
Should I use sale proceeds to pay down the new loan?
It lowers your repayments, but the cash is then tied up in the property. Keeping it in an offset account can reduce interest while leaving the money accessible, though some offset loans carry a higher rate or fee.
Is a fixed rate a good idea if I expect a lump sum?
A fixed rate can limit extra repayments and may involve break costs if you repay early. A variable or split loan can offer more flexibility.
Do I need pre-approval before selling?
It is not compulsory, but it shows what you can borrow before you commit. It is conditional and usually expires after a set period.
