Simple hacks to downsize your home after separation

Downsizing after separation often makes more sense than staying in a property that no longer fits your life or your budget.

You might be weighing up whether to sell the family home and buy something smaller, or you might already know downsizing is the right move but aren't sure how to structure the lending. Either way, the decision comes down to what you can afford, what you need right now, and whether the numbers actually work in your favour.

Why downsizing can reduce financial pressure

Moving to a smaller property can lower your monthly repayments, reduce ongoing costs like rates and maintenance, and free up equity you can use to settle debts or rebuild your savings. If you're buying out your ex-partner or managing the property division as part of a settlement, downsizing can also simplify the process by removing the need to refinance a large existing loan on a single income.

Consider someone who owned a four-bedroom home valued around $850,000 with a remaining mortgage of $420,000. After the settlement, they needed to buy out their ex-partner's share of the equity, which would have required refinancing to around $640,000. On a single income, that repayment was out of reach. Instead, they sold the property, split the proceeds, and purchased a two-bedroom townhouse for $520,000 with a home loan of $340,000. The monthly repayment dropped by over $1,200, and they walked away with enough equity to cover settlement costs and rebuild their savings.

How lenders assess your borrowing capacity as a single parent

Lenders assess your capacity to service a loan based on your income, existing debts, and living expenses. As a single parent, you'll need to show that your income can cover the repayments after all other financial commitments are accounted for. Child support you receive is generally included as income, though lenders may discount it by a percentage depending on their policy. Some lenders accept 100% of child support, while others might only count 80%.

If you're downsizing and using equity from the sale of the family home as your deposit, you may still need to meet serviceability requirements on the new loan amount. Your deposit size will affect your loan to value ratio, and if you're borrowing above 80% of the property value, Lenders Mortgage Insurance may apply.

Choosing between variable, fixed, or split loan structures

A variable rate gives you flexibility to make extra repayments and pay down the loan faster without penalty. A fixed rate locks in your repayment for a set period, which can help with budgeting if your income is tight. A split loan gives you both, dividing the loan amount between a variable and fixed portion so you have some certainty without losing all flexibility.

If you expect your income to increase in the next year or two, a variable rate might suit you. If you're working reduced hours or managing irregular child support payments, the certainty of a fixed rate can make things more predictable. Each option depends on your situation, and there's no single answer that works for everyone.

Using an offset account to reduce interest without locking funds away

An offset account is a transaction account linked to your home loan. The balance in the offset account reduces the amount of interest you're charged on the loan, but you can still access the money whenever you need it. If you have $20,000 in an offset account and a loan balance of $340,000, you're only charged interest on $320,000.

This can be useful if you're rebuilding your savings after settlement or holding funds for upcoming costs like school fees or legal expenses. Not all loan products include an offset account, and some lenders charge a fee for the feature, so it's worth comparing the cost against the interest you'll save.

Timing the sale and purchase to avoid bridging finance

If you're selling the family home and buying a smaller property at the same time, timing the settlements can save you the cost and complexity of a bridging loan. A bridging loan is short-term finance that covers the gap between buying your new property and receiving the proceeds from your sale. It can be useful if you find the right property before your sale settles, but it comes with higher interest rates and additional fees.

Where possible, aim to settle your sale first, then use the proceeds to fund your purchase. This avoids the cost of bridging finance and gives you certainty about how much deposit you'll have available. If the timing doesn't line up, speak to your broker about whether bridging finance is the right option or whether it's worth waiting for the next opportunity.

Accessing government support if you're a single parent buyer

Under the Australian Government 5% Deposit Scheme, eligible single parents can purchase with a deposit of as little as 2% of the property value. Housing Australia provides a guarantee to the lender, allowing you to avoid paying Lenders Mortgage Insurance even with a low deposit. There are no income caps, and the scheme applies to both first home buyers and those who have owned property before.

Property price caps vary by state and region. If you're downsizing in a regional area or a lower-cost suburb, the price cap may be well above the properties you're looking at. You'll need to apply through a participating lender, and not all lenders are on the panel, so it's worth checking eligibility and availability before you start your search. You can read more about how the 5% Deposit Scheme works for people going through separation.

What to do if your deposit is smaller than expected

If the settlement leaves you with less equity than you anticipated, you may still have options. Some lenders offer low-deposit loans with LMI, and the cost of LMI can be added to the loan amount rather than paid upfront. If you have a family member willing to act as a guarantor, a guarantor loan can help you borrow with a smaller deposit or avoid LMI altogether.

Another option is to delay the purchase and rent for a short period while you rebuild your deposit. This can give you time to increase your savings, settle any remaining debts, and improve your borrowing capacity. Renting doesn't mean you've lost the opportunity to buy. It just means you're giving yourself more options when you're ready.

Call one of our team or book an appointment at a time that works for you. We'll take the time to understand where you are, what you're working with, and what makes sense for your situation.

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