Top tips to downsize your home in Cheltenham

Downsizing means selling a larger home and purchasing something smaller, often to reduce costs or unlock equity.

For residents in Cheltenham, downsizing typically involves moving from a family home on a quarter-acre block to a villa, townhouse or apartment closer to Southland or the Charman Road precinct. The suburbs around Bayside offer a range of property types suited to downsizing, and many buyers find they can remain in the area while reducing their ongoing expenses and freeing up capital for other purposes.

Why your existing home loan structure affects your downsizing plan

Your current loan structure determines how much capital you can access and whether there are costs involved in exiting early. If you have a fixed rate loan with time remaining on the fixed term, break costs may apply when you sell. These costs reflect the lender's loss when you repay a fixed loan before the term ends, and they can be substantial depending on how much rates have moved since you locked in.

Consider someone in Cheltenham who fixed their rate two years ago at 2.5 per cent and still has 18 months remaining on the term. If current fixed rates are sitting closer to 5 per cent, the lender has lost the opportunity to lend that money at the higher rate. The break cost compensates for that difference and could run into thousands of dollars. You can ask your lender for a discharge estimate before you list the property, which shows the exact figure based on your loan balance and remaining term.

If you are on a variable rate or your fixed term has ended, no break costs apply. You will still pay a discharge fee, typically between $300 and $500, to close the loan and remove the mortgage from the title.

Matching your new loan amount to the property you are buying

Downsizing often means purchasing a property that costs considerably less than the sale price of your current home. The difference between the two figures, after selling costs and loan discharge, becomes available equity. How you structure your new loan depends on whether you want to minimise debt, retain access to funds, or hold capital for other purposes such as renovations or supporting family members.

In our experience, buyers who are downsizing from a $1.2 million property to a $750,000 unit often have enough equity to purchase without a loan at all. Others prefer to retain some borrowing in place and keep a portion of the sale proceeds in an offset account or investment. There is no single correct approach, but the decision affects your cash flow, tax position and flexibility over the following years.

If you do take out a new home loan, lenders assess your application based on your current income and expenses. Retirees or semi-retired buyers may find serviceability more challenging if their income has reduced, even when they have substantial equity. Lenders apply the same serviceability buffer to all applicants, meaning you need to demonstrate capacity to service the loan at an interest rate three percentage points above the actual rate. Some lenders offer more flexible assessment policies for downsizers with strong equity positions, so it is worth comparing your options rather than assuming your current lender is the only choice.

Offset accounts and variable rates when your borrowing needs have changed

An offset account linked to your home loan reduces the interest you pay by offsetting your savings balance against the loan balance. If you are downsizing and expect to hold a significant amount of equity in cash, pairing a variable rate loan with a full offset account can reduce your interest costs without locking funds away.

As an example, a Cheltenham buyer purchasing a $650,000 townhouse might borrow $300,000 and hold $200,000 in a linked offset account. Interest is charged only on the net balance of $100,000, but the full loan remains in place, preserving access to the offset funds if needed. This structure works particularly well when income is irregular or when you want to retain flexibility for future spending, travel or gifts to family.

A variable rate also allows you to make extra repayments without penalty and redraw those funds if your circumstances change. Fixed rates generally do not offer the same level of flexibility, though some lenders allow a capped amount of additional repayment during the fixed term. If your priority is certainty over cost, a fixed rate can still be appropriate, but most downsizers value access and flexibility more highly once the pressure of a large mortgage has lifted.

Stamp duty and eligibility for concessions when buying your next home

Stamp duty in Victoria applies to most property purchases, including downsizers buying their next home. The rate is calculated on a sliding scale based on the purchase price, and for a $700,000 property, duty is approximately $38,000. No specific downsizer concession exists in Victoria, so even if you are selling a family home and moving to something smaller, standard duty applies unless you qualify under another exemption.

First home buyer concessions do not apply to downsizers who have previously owned property. The off-the-plan duty concession, which reduces duty on purchases of new apartments and townhouses not yet titled or substantially completed, is available to all buyers, not only first home buyers. If you are purchasing a new unit in one of the developments near Westfield Southland or along the Nepean Highway, you may be eligible for a reduced duty calculation based on the land value only. This concession was extended to contracts signed on or before 31 October and applies regardless of whether you have owned property before.

When to speak to a mortgage broker before listing your property

Most people wait until they have sold before thinking about their next loan, but speaking to a mortgage broker in Cheltenham before you list gives you a clearer picture of what you can borrow, what your repayments will be, and whether your current loan structure will cost you anything to exit. It also means you can move quickly when you find the right property, particularly in a suburb like Cheltenham where well-located villas and townhouses attract multiple offers.

A broker can also arrange home loan pre-approval, which signals to agents and vendors that you are a serious buyer with finance already in place. Pre-approval is typically valid for three to six months and is based on a full assessment of your income, expenses and credit history. It does not lock you into a specific lender or rate, but it does confirm your borrowing capacity and gives you confidence during the purchase process.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions