There are a number of reasons why you might choose to upsize to a larger home. A bigger family, an increase in income, the need for a home work space 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.
What can I afford?
You might not have hundreds of thousands of dollars in savings. Yet, the beauty of upsizing is that 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 remaining on your mortgage, excluding interest.
You can use this as security with the bank to borrow more. However, only a certain proportion of your equity is usable. 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. Of course, this will mean you take longer to pay it off and incur more interest.
What are the costs of 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 two main factors. They include 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 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 necessary 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. Once you pay that off the rent becomes an excellent source of income.
Of course, there are also a variety of costs to consider in owning investment property. You cannot put your mortgage repayments on hold. If your property is vacant, you need to have the money to cover repayments while you find new tenants. This 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 you sell an existing property. They offer short-term access to funds at a sometimes higher rate of interest. If you struggle to sell your existing home in the time frame you had hoped, you risk paying much more. Alternatively you may have 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 you do your research first. When it comes to property ownership, these are the decisions that affect the future of your financial security.
Author: Andrew Mirams is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor. He holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). With over 27 years of experience Andrew holds multiple awards, including regularly featuring in both the top 100 mortgage brokers list and Top 50 Elite business writers. He was Victoria’s favourite Mortgage Broker at the 2015 Investors Choice Awards and Intuitive Finance won the 2016 “Best Independent Office” and “Best Customer Service” at the recent 2016 Better Business Awards. Visit Intuitive Finance for more information.