Can downsizing work when buying a home | Pros, cons and tips - NAB

What downsizing means for your next move

Downsizing is when you sell your current home and buy a smaller one. For many people, it’s a way to reduce costs or find a place that’s easier to maintain. Others choose it because their needs have changed. For example, you may no longer need as many bedrooms, or you might want to live closer to family, transport or medical services.

Downsizing has become more common as property prices have grown, because selling a larger home can free up money to help fund your next purchase. Some buyers use the net sale proceeds to reduce the size of their new home loan, while others put part of it toward savings or lifestyle goals.

If you’re thinking about moving to a smaller place, it helps to understand how downsizing affects your budget, borrowing power and long-term plans. You can also compare different loan options and get a a clearer idea of what your repayments might look like.

Pros and cons of downsizing

Downsizing can make your next move easier, but it also comes with trade-offs. Understanding both sides helps you decide if it is the right step for your situation.

Pros

  • Downsizing offers you a chance to reduce your mortgage compared to what you had on your previous home. If you borrow less, you may enjoy lower ongoing repayments. 
  • A smaller home can also cost less to run. You might spend less on electricity, water, rates and general upkeep. 
  • Some people use the savings improve their financial safety net, free up money for travel or small renovations.
  • Another advantage is the freedom to choose a home that suits your current lifestyle. This could mean a single level property, a place closer to transport, or a low-maintenance townhouse.
  • Many buyers also look for locations that bring them closer to friends or family, which can make day-to-day life more convenient.

Cons

  • Selling and buying both involve fees, including stamp duty, real estate agent commissions and moving expenses. These can add up quickly and reduce the money you keep from the sale.
  • Interest rates may also be higher on your new loan, especially if you’re coming off a past fixed rate. This can affect your repayments even if the loan amount is smaller.
  • Leaving a long-term family home can feel difficult, especially if it holds strong memories.
  • You may also need time to adjust to living in a smaller space or a different type of neighbourhood. Thinking through these parts of the move can help you prepare and avoid surprises.

How downsizing interacts with loans and equity

Equity and LVR

Before you downsize, the equity you’ve built up in your current home can influence your loan options for the next purchase. Lenders look at your loan to value ratio, or LVR, which is the percentage of the property price you need to borrow. A lower LVR can improve your access to competitive interest rates and may reduce upfront costs. In many cases, buyers with lower LVRs can avoid lenders mortgage insurance, resulting in significant savings.

Borrowing power

Your borrowing power may change after downsizing, even if your income stays the same. Lenders reassess your living expenses, existing debts and overall financial position when you apply for a new loan. Lower housing costs can help, but interest rates and other commitments still matter. Estimating what you can reasonably afford using the borrowing power calculator can help you plan with confidence.

Loan features

Downsizing also gives you the chance to review which loan features suit your next stage of life. Options such as offset accounts, extra repayments or redraw facilities can help manage cash flow and provide flexibility. Choosing a loan structure that matches how you plan to live and spend can help you get more value from your new home loan.

Government settings relevant to downsizers

Some government policies are designed to support older Australians who are downsizing. One of the most relevant is the downsizer super contribution, which allows eligible people aged 55 and over to contribute money from the sale of their main residence into superannuation. This can help boost retirement savings, but eligibility rules, contribution limits and timing requirements apply. Because government rules can change, it’s important to check current settings and understand the implications before finalising your downsizing plans. Speaking with a financial adviser can help you decide whether this option suits your long-term plans.

Practical steps before you downsize

Step 1: Work out your net sale proceeds

Estimate what your home might sell for, subtract your remaining mortgage, selling costs and the price of your next home.

Step 2: Account for hidden and overlooked costs

Include expenses such as stamp duty, strata fees, legal fees, building checks, removalists and loan setup fees. These costs can reduce how much equity you carry into your next purchase.

Step 3: Review local market timing and available stock

Look at how many smaller homes are currently on the market in your preferred area and how prices are trending. You can check listings, speak with local agents to understand your timing options.

Step 4: Check your borrowing position early

Use calculators or speak with a lender to understand how much you can borrow after downsizing. This helps you narrow your search and avoid overcommitting.

Step 5: Consider how the move will affect your broader finances

Getting advice on tax, super and long-term planning can help you understand how downsizing may affect your overall position.

Step 6: Think carefully: Does downsizing always save money?

There’s no single answer. It depends on property choices, loan costs and the total expenses involved in selling and buying.

Step 7: Get support

You can begin by comparing loan options and rates at any time in your journey. When you’re ready, speak with our home loan experts to plan your move.

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Explore other home and property guides

Discover how much it costs to sell a house

Costs you may face when selling your house, and buying a new home.

Understanding bank valuations on your property

A bank valuation helps determine how much we can lend you. Learn more.

Bridging loans: How to buy first before selling

Explore the pros and cons and decide if a bridging loan is right for you.

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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.

Target Market Determinations for these products are available at nab.com.au/TMD.