Why Downsizing Can Be Harder to Finance Than You'd Think
Banks treat downsizers differently to other owner-occupiers, and the difference shows up in serviceability.
Your income matters more than your equity. A retired couple with $800,000 from the sale of their family home and a combined pension income of $45,000 will usually borrow less than a working couple with $150,000 in savings and dual salaries. The serviceability buffer applies to everyone, which means the lender assesses your ability to repay at a rate roughly 3 percentage points higher than the actual rate you'll pay. If your only income is the age pension and a small amount of super drawdown, you're assessed against a loan amount that might be half what you expected.
Consider a buyer downsizing from a four-bedroom home in the Adelaide Hills. They sell for $750,000, clear the existing mortgage, and walk away with $520,000 after costs. They're looking at a two-bedroom unit closer to the city and assume a borrowing capacity of at least $300,000. But one partner has retired and the other works part-time, bringing total assessable income to $62,000. After the 3 percentage point buffer and living expenses, the approved loan amount comes in at $180,000. They adjust the property search or bring forward a larger portion of their super.
When the Bank Wants to See Income You've Already Stopped Earning
Retirement changes the documents lenders rely on.
If you've retired in the past 12 months, your most recent tax return will show a full year of salary that no longer exists. Lenders want current payslips or a Centrelink statement showing ongoing income. If you've transitioned to account-based pension payments from super, the lender will usually accept those, but only the regular pension component, not the lump sum you've accessed separately. One-off super withdrawals don't count as income. The same applies to dividends from shares unless you can demonstrate a consistent multi-year history.
In our experience, applicants who retire mid-settlement run into trouble. They exchange contracts while still working and give notice a week later, assuming the sale of their current home and their deposit will carry the application through. The lender reassesses serviceability before final approval and declines the loan. You need to structure the finance around the income you'll have at settlement, not the income you have when you first apply.
Selling Before You Buy vs Buying Before You Sell
This decision changes your borrowing capacity and your risk profile.
If you sell first, you remove any existing mortgage from your liabilities, which increases what you can borrow on the new property. You also have certainty around your deposit. But you need somewhere to live while you're searching, and rental availability in Adelaide's inner suburbs has been tight. If you buy first using a bridging loan, you're servicing two mortgages simultaneously, and lenders assess your capacity accordingly. Bridging finance typically runs for six to twelve months and costs more than a standard variable rate. It works when your sale is genuinely imminent and you have enough buffer in your income or liquid assets to cover both repayments during the crossover.
A downsizer buying in Norwood or Prospect might bridge if they've already accepted an offer on their existing home with a 90-day settlement. That gives them time to secure the new property without competing in a rental market where leases often require a six or twelve month commitment. The alternative is to rent short-term or stay with family, then purchase once the sale has settled and funds are cleared. For retirees with limited ongoing income, that's usually the lower-risk approach.
How Lenders Treat Super Drawdowns and Pension Income
Not all retirement income is assessed the same way.
The age pension is treated as ongoing assessable income by most lenders. Account-based pensions from super are also accepted, though some lenders apply a reduction factor or require evidence of the account balance to confirm sustainability over the loan term. The regularity matters. A $2,000 monthly pension payment will be assessed, but a $50,000 lump sum withdrawal used for the deposit will not be counted as income, even though it came from the same super fund. If you're planning to draw down from super to fund part of your lifestyle, make sure those drawings are structured as a pension rather than irregular lump sums, and start the pension at least three months before you apply for finance.
Another area that catches people is the treatment of dividends or rental income from an investment property they plan to keep. Lenders will usually shade rental income to 80% of the lease amount to account for vacancy and maintenance, and that reduction flows through to your overall serviceability. If the rental property has a mortgage attached, the lender includes that liability as well, even if the rent covers the repayments. Paying out that investment loan before you apply for the new home loan can materially improve your capacity.
What Happens When You Want to Keep a Small Loan for Offset Flexibility
Some downsizers prefer to borrow a modest amount rather than pay cash outright.
The logic is sound. You might have $600,000 available but choose to borrow $150,000 and park $400,000 in an offset account linked to the loan. That keeps your cash accessible, reduces the interest you pay to nearly zero if the offset balance stays high, and preserves flexibility if you need funds for health costs, travel, or helping family. The loan also maintains your relationship with a lender, which can matter if you later want to access a line of credit or refinance for another purpose.
Lenders are comfortable with this approach as long as you meet serviceability. The loan amount is low relative to the property value, which makes it low risk from a credit perspective, and the existence of a large offset balance is visible to the credit assessor. Some lenders offer specific downsizer products with no ongoing monthly fees and fee-free redraws, though the interest rate might not be the lowest on the market. A broker can structure the loan to match your intention, whether that's full offset flexibility or a mix of offset and redraw across a split loan.
Using the Downsizer Super Contribution Before or After Settlement
The downsizer contribution lets you put up to $300,000 per person from the sale of your home into super, even if you're over the usual contribution caps.
You need to have owned the property for at least ten years, and you or your spouse must be 55 or older at the time you make the contribution. The contribution must be made within 90 days of settlement. This can reduce your assessable assets for the age pension means test and give your super a final boost before you start drawing it down. But if you're relying on that sale equity for the deposit on your next home, you need to calculate carefully. Putting $300,000 into super might improve your retirement income over time, but it also removes $300,000 from your available cash for the new purchase.
We regularly see this play out when one partner wants to maximise super and the other wants to minimise the mortgage on the new property. Both are legitimate goals, but they pull in opposite directions when your total liquid assets are fixed. A middle path is to make a partial downsizer contribution and use the rest for the deposit, or to delay the contribution until after you've settled the new property, as long as you stay within the 90-day window from the sale settlement.
How Strata Levies and Council Rates Affect Your Borrowing Capacity
Dowsizing often means moving from a house to an apartment or townhouse, and that brings strata levies into the serviceability equation.
Lenders treat strata levies as an ongoing committed expense, the same way they treat existing loan repayments or credit card limits. A unit in Glenelg with $2,500 per quarter in levies reduces your borrowing capacity by roughly the same amount as a $15,000 personal loan. If you're moving from a freehold house with $2,000 annual council rates to a strata unit with $10,000 annual levies and $1,800 in rates, that's a $8,200 per year increase in non-discretionary costs. It doesn't sound like much until you apply the serviceability buffer and realise it cuts your maximum loan amount by $40,000 or more, depending on the lender's assessment model.
The other side of this is comparing the total cost of ownership. A house might have lower levies but higher maintenance, insurance, and garden upkeep. An apartment shifts some of those costs into the levies but removes the obligation to fund roof repairs or exterior painting yourself. From a serviceability perspective, only the levies appear on the application, which means the lender's assessment doesn't capture the full financial picture. You need to account for that separately when you're deciding how much to borrow.
Structuring the Loan Around Aged Care or Health Costs Later
Your home loan needs to fit the next stage, not just the next property.
If there's a reasonable possibility that one of you will move into aged care within ten years, you want a loan structure that allows for a lump sum repayment or full discharge without penalty. That means a variable rate or a short fixed term, and it means keeping the loan amount conservative enough that you can clear it from the proceeds of selling the property if needed. A five-year interest-only period can reduce repayments now and leave the principal unchanged, which might suit someone who expects to sell again before the principal-and-interest repayments begin. Not every lender offers interest-only to retirees, and those that do will assess serviceability on a principal-and-interest basis anyway, but it's worth asking for if your situation justifies it.
Another angle is setting up access to equity through a line of credit or redraw facility while your income still supports an application. Once you're fully retired and living on the pension, your ability to increase a loan or open a new credit facility drops. If you think you might need $30,000 in three years for health-related modifications to the home, arrange that flexibility now rather than assuming you can refinance later. The line of credit sits unused until you need it, and you only pay interest on what you draw.
Why Loan Structure Matters More Than Rate When You're No Longer Working
Rate is still relevant, but flexibility is worth paying for when your income is fixed.
A loan that's 0.15% cheaper but charges break costs on early repayment or locks you into a three-year fixed term might cost you more in the long run if your circumstances change. Downsizers are more likely than other borrowers to repay early, either because they decide to sell again, because they receive an inheritance, or because they access more super than originally planned. A variable rate loan or a fixed loan with a large fee-free prepayment allowance gives you room to move. Some lenders allow up to $30,000 per year in extra repayments during a fixed period without penalty, which can be enough to clear a modest loan ahead of schedule.
The offset account becomes more valuable when you're holding a large cash buffer for health or lifestyle costs. A $200,000 loan with a $150,000 offset means you're only paying interest on $50,000, but you still have the full $150,000 available if you need it. That combination of low interest cost and high liquidity is harder to replicate once you've paid the loan down to $50,000 and put the other $150,000 into a savings account earning less than the home loan interest rate you're avoiding.
Call one of our team or book an appointment at a time that works for you. We've structured downsizer loans across every postcode in Adelaide and we know which lenders assess pension income properly and which ones still rely on outdated policy.
Frequently Asked Questions
Can I borrow money to downsize if I'm on the age pension?
Yes, most lenders will accept age pension as assessable income. Your borrowing capacity will depend on your total income including any super drawdowns or other sources, and the lender will still apply the serviceability buffer. The loan amount will usually be lower than when you were working, even if you have significant equity from the sale of your previous home.
Should I sell my current home before buying the new one when downsizing?
Selling first gives you certainty on your deposit and removes your existing mortgage from serviceability calculations, which increases what you can borrow. Buying first using bridging finance lets you secure the new property without renting, but you'll be assessed on servicing both loans at the same time. The right approach depends on your income, timeline, and risk tolerance.
How do lenders assess super drawdowns when I apply for a home loan?
Lenders will usually accept regular account-based pension payments from super as ongoing income. One-off lump sum withdrawals don't count as income, even though they can be used for your deposit. If you're planning to draw from super to fund living expenses, structure it as a regular pension at least three months before applying.
Do strata levies reduce how much I can borrow when downsizing to an apartment?
Yes, lenders treat strata levies as an ongoing expense in the same way they treat loan repayments. A unit with $2,500 quarterly levies can reduce your borrowing capacity by a similar amount to a $15,000 personal loan. The impact is larger when your income is limited, as it often is in retirement.
What loan structure works if I might move into aged care later?
A variable rate loan or a short fixed term with fee-free extra repayments gives you flexibility to repay or discharge the loan without penalty if you need to sell. Keeping the loan amount conservative and maintaining offset or redraw access while you still have assessable income means you won't need to refinance later when your borrowing capacity has dropped.
