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Thinking of upgrading?

The current low interest rates are causing a stir amongst home owners who realise that now could be the time to upgrade. House prices have dropped, which means a potential loss at selling time could very likely be offset by the purchase price of the new home, making the idea of upgrading, even more appealing. Think about it this way- would you be happy to lose 5% ($25,000) on the sale of your $500,000 home, to save 5% ($45,000) on a $900,000 upgrade? The numbers speak for themselves.

·         Why now is a great time

More often than not, upgrading your home is born out of necessity rather than choice, but the good news is that this is an exciting time for those thinking about upgrading to a larger home. The current “buyers’ market” conditions favour those looking to upsize, as you are likely to land a bargain when house hunting in a higher price bracket. Then, as the market rises and begins to favour sellers, you should expect to profit from the sale of your upsized home as prices become more and more competitive. So, if you want to move up the property ladder, now is a prime opportunity to do so.

If you are looking to take advantage of the current market, we’ve got a few simple tips to ensure you make an informed decision.

·         Things to consider

Low interest rates have given Perth buyers more confidence to take on a new mortgage. In saying this, real estate is a long term investment, so it is always important to have a strong understanding of your finances before committing to an upgrade. The decision to upsize your home usually comes about due to exciting times; marriage, a growing family, more purchasing power, a need for more entertaining space, or to be able to work from home are just a few of the common reasons to upsize.

A common misconception about upsizing is that buying a larger property will always lead to an increase in net wealth. This is only the case if you plan to go on to sell the property to release that profit in the future. If you’re not prepared to sell and are planning to stay in your ‘forever home’, your net wealth will remain tied up in the house, which can affect your retirement plans. We recommend that you consider the points below:

1.      How much can you afford to borrow?

The amount that you can afford to borrow will be dependent on your annual income, monthly expenditure, the number of dependents and the proposed term of the loan. We recommend speaking with your financial planner to assess your personal circumstances.

2.      What are your long term goals for your property portfolio?

People tend to upsize either to take a step up in the property market, or to buy their “forever home”. There’s a major difference between buying into a specific lifestyle because of your wants and needs, and upsizing to a property that will serve as an investment that you plan to sell and profit from in the future. If it’s the latter, and you intend to gain a financial profit when you sell, it’s important that the property is purchased in an area with growth potential. However, this may mean that you’ll have to compromise on the area in the short term as areas with the highest growth potential aren’t always the most desirable places to live right now.

3.      Are you able to take on the larger costs that come with a larger property?

A larger home will usually incur a larger cost due to the maintenance and upkeep associated with it, but you also have to factor in the cost of utilities, home insurance, property taxes, possible renovations and council rates.

If you are intending to sell the property in the future for profit, it is important that you don’t reduce your margin by over-capitalising on renovations.

4.      Other financial costs associated with upsizing

When calculating the costs of the upgrade, a nasty surprise which is inevitable when buying property is stamp duty, so it must be factored in. We also recommend that you consider taking out Lenders’ Mortgage Insurance, if you borrow more than 80% of your property’s value.

You will also need to factor in the costs associated with actually moving, such as the cost to transfer utilities, any possible new furniture needs, and moving day expenses.

Also, there may be a larger mortgage cost, higher maintenance fees and increases in council rates.

5.      Bridging loans

You may have to consider if bridging loans are an option for you to purchase a property prior to the settlement of your existing home. Your financial planner will be able to assist you in making this decision.

We always recommend consulting your mortgage provider or financial expert to ensure the option to upsize suits you and your financial situation. Peard Finance can help you with your upsizing needs, give them a call today for more information.