Downsizing Guide: Financial Benefits of Moving to a Smaller Home

For many Australians, the family home represents their largest asset and decades of memories. As circumstances change - children leave, retirement approaches, or maintaining a large property becomes burdensome - downsizing offers an opportunity to release equity, reduce ongoing costs, and simplify life.

However, downsizing involves significant financial decisions with implications for retirement income, pension eligibility, and long-term security. Understanding your options, the tax advantages available, and how to manage the transition helps ensure downsizing achieves your goals.

At Mortgage & Finance Advisory, we help clients navigate the financial aspects of downsizing, from understanding your equity position to arranging bridging finance when needed.

Financial Benefits of Downsizing

Releasing Home Equity

Moving from a higher-value property to a lower-value one releases the difference as cash. If you sell a $1.2 million home and purchase for $800,000, you've released $400,000 (minus transaction costs) that can fund retirement, travel, helping family, or boosting superannuation.

Reduced Ongoing Costs

Smaller properties typically mean lower council rates, reduced insurance premiums, smaller utility bills, and less maintenance. A move from a large family home to a townhouse or apartment can reduce annual ownership costs by thousands of dollars.

Lifestyle Improvements

Beyond pure finances, downsizing can improve quality of life. Less time maintaining property and gardens means more time for interests and family. A better-located smaller property might offer easier access to amenities, medical services, and public transport.

The Downsizer Super Contribution

The federal government's downsizer contribution scheme allows Australians aged 55 and over to make a one-off contribution of up to $300,000 (or $600,000 per couple) into superannuation from the proceeds of selling their family home.

Key Eligibility Criteria

To qualify for the downsizer contribution, you must be aged 55 or older at the time of contribution, the home must have been owned by you or your spouse for at least 10 years, the property must be in Australia and not a caravan or houseboat, the contribution must be made within 90 days of settlement, and you can only use this scheme once in your lifetime.

Understanding the Costs

Downsizing involves significant transaction costs that reduce the net benefit. These must be factored into your planning.

Selling Costs

Agent commission typically runs 1.5-2.5% of sale price. On a $1.2 million sale, that's $18,000-$30,000. Marketing costs, conveyancing, and building reports add several thousand more.

Buying Costs

Stamp duty is the major cost when buying. In Victoria, purchasing an $800,000 property means approximately $40,000-$44,000 in stamp duty (unless you qualify for an exemption or concession). Conveyancing, inspections, and connection fees add to the total.

Moving and Setup Costs

Professional removalists, storage if needed, new furniture for a different-sized space, and various setup costs can easily reach $10,000-$20,000 depending on circumstances.

Pension and Centrelink Implications

If you receive or expect to receive the age pension, downsizing has important implications for the assets test and income test that determine your pension entitlement.

Assets Test Exemption Period

When you sell your home intending to purchase another, the proceeds are generally exempt from the assets test for up to 24 months (with a 12-month extension available in some circumstances). This gives you time to find and settle on a new property without pension impacts.

Super vs Other Assets

Funds placed into super via the downsizer contribution are assessed under the assets test as financial assets and deemed to earn income for the income test. This differs from your principal home, which is exempt from the assets test. For some pensioners, putting sale proceeds into super could actually reduce pension entitlements.

The interaction between home sale proceeds, super contributions, and pension entitlements is complex. We strongly recommend consulting with a financial adviser and Centrelink before making decisions.

Bridging Finance Options

One of the practical challenges of downsizing is timing - you may find your ideal new property before selling your current home, or want to avoid the stress of a rushed sale.

Bridging finance is a short-term loan that covers the gap, allowing you to purchase your new home before settling on the sale of your existing property. You effectively hold two properties temporarily, with the bridging loan covering the new purchase until your sale proceeds arrive.

How Bridging Finance Works

The lender provides funds to purchase your new property based on the combined security of both properties and anticipated proceeds from your sale. Once your existing home sells, the bridging loan is paid out and you're left with just your ongoing mortgage (if any) on the new property.

Bridging loans typically have higher interest rates than standard mortgages and usually allow a maximum term of 6-12 months. They suit situations where you've found the perfect property but your sale hasn't completed, or where you want flexibility in timing without pressure to sell quickly.

Emotional Considerations

Downsizing isn't purely a financial decision. The family home often holds decades of memories, and leaving it can be emotionally challenging regardless of the practical benefits.

Take time to consider what's most important to you. Some people find downsizing liberating; others find it harder than expected. There's no right timeline - some people are ready to move on while others need more time to adjust to the idea.

Melanie McNaughton

Principal Lending Strategist

Melanie helps clients navigate the financial aspects of downsizing, ensuring they understand their options and make decisions that support their retirement goals.