Downsizing as the exit for a business second mortgage: planning it properly

Many business owners in their fifties and sixties are sitting in a family home that’s bigger than they need. The children have moved out, the stairs are getting old, and the plan has always been to sell and move somewhere smaller “in a few years.” When the business needs funding in the meantime, that planned sale can become the exit for a second mortgage.

It can be a sensible structure. It also involves the one asset where getting it wrong matters most, so it deserves careful planning.

When is downsizing a genuine exit?

The difference between a genuine exit and a hopeful one is whether the decision has already been made. Compare:

Genuine exit	Hopeful exit
The household has decided to sell and has a timeframe	“We could always sell the house if we had to”
Everyone who lives there is on board	One partner hasn’t really agreed
A recent appraisal supports the value	Value based on a neighbour’s sale years ago
The next home has been thought about	No idea where you’d go
Selling and buying costs have been estimated	Costs not considered

A second mortgage built on the left-hand column is a planned bridge. One built on the right-hand column is a home placed at risk for a business need. Our page on protecting the family home covers the safeguards.

What has to be true for it to work?

Everyone agrees. Selling the family home affects everyone who lives there. Every registered owner signs the second mortgage, and the household needs to be genuinely aligned on selling. See talking it through with a co-owner.

The numbers work after costs. Start with a realistic sale price, then subtract:

• The first mortgage balance.
• The second mortgage balance, including any costs to the planned repayment date.
• Agent’s commission and marketing.
• Legal and conveyancing costs.
• Any other debts that must be cleared at sale.

What’s left must comfortably fund the next home, including stamp duty, moving costs and any renovation. If the remainder is thin, the plan is fragile.

The timing is realistic. Allow time for preparing the home, the campaign, negotiation and settlement, then add a margin. Choose a second mortgage term that runs well past your expected settlement.

If those three are in place, you can ask a specialist to look at the structure. There’s no credit check when you first enquire.

What about tax and super?

Capital gains tax. The family home is usually covered by the main residence exemption, but the ATO’s guidance notes it can be affected if you’ve earned assessable income from the home, such as running a business from it or renting part of it. If that applies, ask your accountant what it means for your sale proceeds.

Downsizer super contributions. For owners 55 and over, the ATO explains that you may be able to contribute up to $300,000 each from the sale of your home to super if:

• You’re 55 or older when you make the contribution.
• The home was owned by you or your spouse for 10 years or more.
• The contribution is made within 90 days of receiving the proceeds (usually at settlement), unless the ATO grants an extension.

The ATO notes that downsizer contributions don’t count towards the usual contribution caps but do count towards your total superannuation balance. If this matters to your plans, factor it into how sale proceeds will be split between repaying the second mortgage, buying the next home and super. Get advice before you commit.

How do you build in a fallback?

Downsizing as an exit has a particular risk: the market. Campaigns can run longer than planned, and prices can soften. Build a fallback:

• A price you’d accept, agreed in advance, below your hoped-for figure.
• A longer loan term than the expected sale timeline.
• A secondary exit, such as the sale of another asset or a refinance of the remaining balance.
• A decision point. If the home hasn’t sold by a certain date, what will you do?

The exit plan checklist has a sale route that helps you test these.

Should the business be part of the plan?

For many owners approaching this stage of life, downsizing coincides with thinking about the business’s own future: succession, a partial sale, or winding down. business.gov.au’s guide to selling a business is a useful starting point if that’s on your mind.

If both are happening, make sure the plans fit together. A second mortgage that funds the business now and is repaid by the home sale later only makes sense if the business is still worth supporting. See our guide to borrowing near retirement.

An illustrative plan

A couple in their late fifties own a family home worth about $1,600,000 with $200,000 left on the mortgage. They’ve agreed to sell within eighteen months and buy a townhouse for around $900,000. Their business needs $300,000 to clear an ATO debt and fund a contract.

• Combined LVR after a $300,000 second mortgage: about 31%. Comfortable.
• Expected sale: listing in twelve months, settlement by month fifteen.
• Second mortgage term: twenty-four months, giving nine months of slack.
• After repaying both loans and allowing for selling costs, the remainder comfortably covers the townhouse, stamp duty and moving.
• Fallback: a lower acceptable price agreed in advance, and a smaller refinance if the sale is delayed.
• Super: they check with their adviser whether downsizer contributions would suit after settlement.

The sale was already the plan; the second mortgage simply bridges to it. Illustrative only.

How should you think about the next home?

Downsizing only works as an exit if there’s a realistic next home at the end of it. Before relying on the sale, spend some time on the other half of the move:

• Where will you live? A specific suburb or region, and the type of property: townhouse, unit, smaller house, or a move to a regional town.
• What will it cost? Look at recent sales, not asking prices, for the kind of property you’d buy. Add stamp duty for your state, legal costs, moving costs and any work needed to make it suit you.
• Buy first or sell first? Selling first gives certainty about proceeds but may mean renting in between. Buying first can create a second bridging need. Either way, the second mortgage’s term should account for it.
• Will the next home suit you for the long term? If accessibility or proximity to family will matter in ten years, factor that in now so you don’t face another move and another set of costs.

A downsizing plan that works on paper but leaves you buying a home you don’t want is not a good exit. Talk it through as a household, ideally with a real estate agent you trust giving honest figures on both sides of the move.

What if the market moves while you wait?

Property markets don’t run to business timetables. If prices soften between borrowing and selling, the sale may bring in less than expected, and the remainder after repaying both loans may shrink. Build this into your stress test: what happens if the sale price is 10% lower? If the plan still works, including the next home, you have a robust exit. If it only works at today’s prices, consider borrowing less or adding a fallback. Our guide to stress-testing before you borrow shows how to run that scenario.

It’s also worth agreeing in advance what you’ll do if the market moves the other way. A stronger market than expected can be tempting to wait on, but the second mortgage still has a term. Agree a listing date and stick to it.

Make the plan before you rely on it

If downsizing is your intended exit, send a short enquiry describing the home, the expected sale timing, the amount the business needs and where you plan to move. One specialist will look at whether the plan holds together, with no credit check at that point and no distribution of your details to multiple lenders. Please be realistic about the value and timing. They’re what this exit depends on.

Talk through a downsizing exit →