There are a number of reasons why people choose to upsize to a larger home – a bigger family, an increase in income, the need for a home workspace or perhaps a change of lifestyle. Whatever the reason, there a number of questions to consider before you decide upsizing is the next step for you.
Should I buy a new house or renovate my current one?
The question you need to consider from the beginning is whether it is worth your while moving or if you can make improvements to your current property. When you consider the taxes, refinancing and moving costs, purchasing a new property can be a costly process. Depending on your circumstances, it might make more sense to renovate your existing home rather than moving house. Renovations can include anything from remodelling the bathroom to building a second storey.
There are also a number of factors in considering home improvements. Firstly, you don’t want to overcapitalise. Overcapitalisation is when you spend more money on the house than it increases in value. Always keep in mind how your renovations may appeal to potential buyers later and if they will pay more for these features. Personal style and preference can often get in the way of smart investment decisions. Although it’s your home and you need to be happy with any changes that you make, you also don’t want to be throwing money down the drain.
Whilst renovating can be a cheaper alternative than moving into a larger house entirely, you need to be realistic about the costs of home improvements. Undoubtedly you’ve heard horror stories of couples beginning renovations only to get halfway through and run out of money. Of course, you don’t want to incur additional costs throughout the process but a buffer is imperative to your financial safety – not to mention your own peace of mind.
Renovating is not a one size fits all, neither is uprooting your family to move house. It’s all about research and weighing up your options.
What can I afford?
The beauty of upsizing is you can use the equity you’ve already accumulated to your advantage. Equity allows you to borrow more than you would otherwise be able. It’s the difference between the value of your home and the amount you have left on your mortgage excluding interest. There are three ways in which you gain equity. The first is through repayments you’ve already made on your loan, hence reducing the principal amount you owe. The second, is through your property increasing in value naturally over time as the market changes. The final method is to put money into home improvements to increase the value of your home.
You can use this as security with the bank to borrow more, but only a certain proportion of your equity is useable. Generally, banks will lend you 80% of the value of your equity. This ensures that if property prices drop, the amount you owe will never exceed your property’s value. If you take out Lenders Mortgage Insurance (LMI), you may find that you can borrow more than this but of course this will mean you take longer to pay it off and incur more interest.
What are the costs involved in upgrading?
Upgrading to a larger home incurs more costs than just the price of the property itself. You also need to consider factors such as:
Stamp duty – this cost depends on a variety of factors including what state you live in and the purchase or market price of your new property. Depending on the circumstances, you’re looking at anywhere between hundreds of dollars to tens of thousands.
Refinance costs – This includes discharge fees, mortgage registration and deregistration fees, application fees, settlement fees, bank valuation fees, title search fees and the preparation of mortgage documents. Altogether, this adds up to over $1,000 worth of costs.
Agent fees – Real estate agents will generally charge between 2 and 3 percent of the selling price of your home.
Legal fees and conveyancing costs – A solicitor and conveyancer offer slightly difference services and levels of expertise whereby a qualified conveyancer will cost you around $1,300-$1,800 and a solicitor sits at the $2,500 mark. There are conveyancer kits online that you can do yourself for far cheaper but professional service is always the safest and most reliable option.
Building and pest inspection reports – the building and pest inspection of your new purchase will cost anywhere between $300 and $600 and while this may seem like a lot for no return, it is an important step in deciding whether or not to buy a property. Without these reports you may find yourself spending thousands on unaccounted for repairs later down the track.
Moving costs – this is a big one many people often forget about. Removalists and cleaning fees will usually total somewhere between $1,000 to $2,000 plus the time and disruption of packing the entirety of your life possessions into boxes.
Maintenance costs – the costs of upgrading continue well past the purchase date. A larger house generally means more living costs. More rooms and space generally means higher utility bills. And if your new property has a large backyard this will require gardening maintenance as well. These costs are a necessary consideration on top of the mortgage repayments you’re already making every month.
Should I sell my old property or hold onto it for investment?
At the end of the day the answer to this question comes down to what you can afford. Property investment can be a great way to secure growth in your wealth for the future. You can rent out the investment property to help pay off the rest of the mortgage and once that is paid off the rent becomes an excellent source of income.
Of course, there are also a variety of costs to consider in owning investment property. Your mortgage repayments cannot be put on hold. If your property is vacant, you need to have the money to cover repayments while you find new tenants, which can sometimes be months at a time. You also have the financial responsibility of any maintenance and repairs, which can be difficult to plan for. If you decide to sell the property more than six years after you’ve moved out, you will also have to pay capital gains tax.
On the other hand, if you decide to sell your property you may require bridging finance. A bridging loan bridges the gap between securing a mortgage for a new property before an existing property is sold. They offer short-term access to funds at a sometimes higher rate of interest. If you struggle to sell your existing home in the timeframe you had hoped, you risk paying much more or alternatively having to sell for less. If you don’t have sufficient funding or security, then you may find yourself paying far more in the bridging period than you can actually afford.
Whichever path you decide to take in the next phase of your life, make sure the decision is a well-researched one. When it comes to property ownership, these are the decisions that affect the future of your financial security and that of your children’s. The best way to understand your own situation better and your options is to talk to the professionals. At Intuitive Finance we work with a range of customers including homeowners looking to upgrade so get in contact today to uncover your financial potential.
Intuitive Finance – the smart choice
The world of banking and finance can be a pretty daunting one for both novice and sophisticated investors and since our establishment in 2002 we’ve focused on providing outstanding service and business standards. This approach was vindicated when we were recently named Victoria’s favourite mortgage broker at the 2015 Investors Choice Awards. For expert advice on lenders mortgage insurance, contact Intuitive Finance.
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The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.
Andrew Mirams is the Founder and Managing Director of Intuitive Finance, a highly respected and multi-award winning Mortgage Brokerage dealing with clients all over Australia and around the world. Andrew has over 30 year’s experience in the finance industry and has assisted clients to secure over $2 Billion in mortgage lending over his time. Intuitive Finance deals with all aspects of lending from helping first homebuyers, someone wanting to upgrade their home or starting out and experienced investors looking to secure that next investment property, we can assist with all those requirements. We also specialise in working with self-employed clients and getting them the best outcomes, along with Commercial and Asset finance solutions. Intuitive Finance is highly regarded in the industry and has been recognised as a national winner of the MFAA customer service award and also one of the finance industry’s top mortgage employers. Our brokers also feature regularly in the Top 100 mortgage brokers list in Australia.
