Avoid these downsizing mistakes when buying your next home

Understanding Your Financial Position When Downsizing

Downsizing your home can be an excellent financial decision, whether you're looking to reduce maintenance costs, free up home equity, or move to a more suitable location. However, the process of applying for a home loan when downsizing requires careful consideration of your current financial situation and future needs.

When you're buying a home that's smaller or less expensive than your current property, you might assume the loan application process will be straightforward. Yet many Australians encounter unexpected challenges that could have been avoided with proper planning and professional guidance.

Calculating Your Borrowing Capacity for a Smaller Home

Your borrowing capacity depends on several factors beyond just the loan amount you're seeking. Lenders will assess your income, expenses, existing debts, and overall financial stability. Even when downsizing, you'll need to provide bank statements and demonstrate your ability to service the new home loan.

Key factors that affect your borrowing capacity include:

• Your current income and employment status
• Existing debts and financial commitments
• The property's value and your intended deposit
• Your loan to value ratio (LVR)
• Credit history and financial behaviour

Many downsizers are surprised to learn that age can impact borrowing capacity, particularly if you're approaching retirement. This makes it crucial to understand your options before beginning your property search.

Home Loan Options for Downsizers

When downsizing, you can access home loan options from banks and lenders across Australia, each offering different features and benefits. The key is understanding which loan structure aligns with your downsizing goals and financial circumstances.

Variable Interest Rate Loans

Variable home loan rates fluctuate with market conditions, meaning your repayments can increase or decrease over time. These loans often come with features like offset accounts, which can be particularly valuable when downsizing if you have substantial funds from your property sale.

Fixed Interest Rate Options

A fixed interest rate home loan provides certainty with your repayments for a set period, typically one to five years. This can be beneficial for downsizers on fixed incomes who want predictable monthly expenses.

Managing Lenders Mortgage Insurance and LVR

One advantage of downsizing is that you may avoid lenders mortgage insurance (LMI) entirely. If your deposit from the sale of your current home results in an LVR of 80% or less, you won't need to pay LMI on your new property purchase.

Calculating home loan repayments becomes more straightforward when you know your exact loan amount and can secure interest rate discounts based on your lower LVR. Many lenders offer better home loan interest rate terms for borrowers with substantial deposits.

The Application Process and Pre-Approval Benefits

Getting pre-approved for your downsizing loan provides several advantages in the current property market. Home loan pre-approval gives you:

• Clarity on your actual borrowing capacity
• Confidence when making offers on properties
• A streamlined application process once you find your new home
• Time to compare different lenders and loan features

The home loan application process requires documentation of your income, assets, and financial commitments. Having these documents organised before you start property hunting can accelerate your settlement timeline.

Timing Your Downsizing Strategy

Successful downsizing often depends on timing your property transactions effectively. You'll need to consider whether to sell first then buy, buy first then sell, or attempt to settle both properties simultaneously.

Each approach has different financing implications:

• Sell first: Provides certainty about your available funds but may require temporary accommodation
• Buy first: Allows you to secure your preferred property but may require bridging finance
• Simultaneous settlement: Can be complex but avoids double moves

Stamp Duty Considerations

When buying a home in a different state or territory, stamp duty rates vary significantly across Australia. Some states offer stamp duty concessions for seniors or downsizers, which can result in substantial savings on your property purchase.

Research the stamp duty implications in your chosen location, as these costs should factor into your overall downsizing budget and loan amount calculations.

Maximising Your Downsizing Benefits

Downsizing successfully means more than just securing a home loan – it's about optimising your entire financial position. Consider how features like an offset account can help you manage any surplus funds from your property sale while reducing interest charges on your new loan.

Many downsizers find they can achieve a lower loan amount than expected, freeing up capital for other financial goals such as boosting retirement savings or funding lifestyle changes.

Working with experienced mortgage brokers who understand the downsizing process can help you access suitable lenders and loan products while avoiding common pitfalls that could delay or complicate your property transition.

Whether you're looking at home loans for your downsizing purchase or considering refinancing options, professional guidance ensures you make informed decisions that align with your long-term financial objectives.

Call one of our team or book an appointment at a time that works for you to discuss your downsizing home loan options.