When downsizing, the key considerations of (1) available deposit and (2) borrowing capacity to determine your property budget are still relevant.
However there are a lot more moving parts. You will need to consider:
Most clients downsize to close their loan out completely and to create some additional funds to live off in retirement. This is in addition to the lifestyle benefits of maintaining a smaller property.
You may still need a loan after downsizing where (1) you would like to hold onto the proceeds of sale of your current home rather than pay down your loan, or (2) the proceeds of sale are not sufficient to completely close out your current loan.
Yes – if you are still working and mid to late into your career, banks want to know you will be able to pay out your loan during your working life without putting yourself into financial hardship.
To do this you will need to demonstrate to the bank you have an ‘exit strategy’ for the loan upon your retirement.
If you are above a certain age, usually 61, banks may apply a ‘retirement rule’ whereby:
An exit strategy refers to how you intend to pay out a home loan upon retirement. Viable exit strategies include:
A bridging loan is a temporary loan for a 6 – 12 month period that allows you to settle on the purchase of your new home while you wait for your old home to sell.
The bridging loan is then closed from the proceeds of sale from your current home, leaving you with a residual loan or “end debt” which you then repay.
Please see the separate page dedicated to Bridging Loans.
Loan portability also known as “security substitution” is a loan feature where you are able to keep your current loan in place but swap the property used as security.
This feature is useful in the process of downsizing where (1) you are unable to demonstrate borrowing capacity to support a loan for your next property and (2) you are happy to sell and settle your current home first.
Generally speaking, there is no capital gains tax paid on a home that has always been your principal place of residence. However, you should seek the advice from your accountant who will take into account your unique circumstances.
This will depend on your scenario, where we have to assess your income relative to the new debt you will take on. We will advise you of borrowing capacity during our assessment process, and at the same time factor in any exit strategies or retirement rule considerations.
Yes, we strongly recommend you seek a pre-approval prior to making an offer on your new home. This will allow you to negotiate with confidence. It will also let you know upfront if the bank will approve a bridging loan should you need one.