Moving up? What you need to know about paying for your next home

Thinking of upgrading your home to something bigger and better? Here’s how to cover your costs.

You’re already on the property ladder, but you’ve outgrown your first home and it’s time to trade up. Unfortunately, there are myriad costs associated with making an upgrade and you’ll need to make sure you can pay for them all.

Understand the costs of selling and buying a home 

There’s no rule-of-thumb percentage that can be applied to the costs of moving. But they can be substantial.

“Moving from one home to another can come with eye-watering costs, particularly for people who have not thought the process through,” Suzy Wiegard, Head of Relationships at Australian Unity, says.

“We have observed clients who are so in love with a new property they may have not considered the net wealth effect of purchasing their new home. The cost to purchase, including stamp duty and selling agent costs, marketing and conveyancing may actually equate to 20% of your equity or 2 to 3 percent of the value of the sales price.” says Suzy. 

“Rather than lose this equity, we are seeing clients choose to renovate and create their ideal space instead. Owners have redrawn their original pre-approval loan and switched to a construction loan after being in the market and missing out of the ideal property in their price range. If you really love the location of where you live, then adding an additional floor for $300K or completing a cosmetic upgrade to the existing floorplan for under $80K, can be a good solution” says Suzy.

There will also be costs incurred in buying your new home. Most notably, of course, you’ll have additional costs if you’re upgrading to a more expensive property. Other expenses could include a buyer’s advocate fee if you choose to use an agent; an independent pre-purchase condition report from a building certifier; and possibly asbestos and pest inspections for older properties. Again, legal and conveyancing fees, as well as any other administrative fees, should also be factored in.

While not an essential cost, many people purchase furniture or appliances for their new home, so it’s worth factoring this in as well. You may also want to hire a removalist to make the big move that much easier.

Stamp duty looms as one of the biggest barriers for house upgraders, says Suzy, particularly in states and territories where “bracket creep” through rising house values has been most pronounced. Refer to the calculator to work out stamp duty costs applicable in different states.

“As a priority, people are right to want to ensure that they have their potential stamp duty covered, not only in its total, but in its timeliness,” Suzy says. “Ideally, you should have it ready before settlement because if you pay it after the contracts have been exchanged, you risk incurring interest charges. The longer you delay, the more you’ll pay.”

Negotiating power is important to consider when selling your home. Clients can feel under pressure to take the next nearest offer on their home, when they have already committed to buying a property without securing a purchaser for their existing home.

Understanding the totality of your moving costs and not just the price of your new home, is vital to working out how much you’ll need to pay for your upgrade and how you negotiate the next move.

Get help from your home equity

Once you know roughly how much your move will cost, there are three main strategies for funding a house upgrade.

Suzy says the most common strategy is to use the equity that you’ve hopefully built up against your mortgage. Your equity is the value of your home on the market, minus the amount of money you still owe to the bank.

“Say your home’s value is assessed at $800,000, and you still have $300,000 to pay back on the mortgage, which means you own the remaining $500,000 — this is your net equity. You can use 80 per cent of this equity, to cover the deposit and stamp duty, while your current home becomes security on the new debt,” Suzy explains.

Understand your borrowing options

“Method two is using your bank account. If you have surplus funds sitting there from the sale of other assets, you can use this as security to borrow against. As part of the loan structure ensure you have a financial buffer. Everyone’s risk profile is different, so this range can vary from 6 months to 2 years of prudent reserves.” Suzy says.

Another consideration in the planning of your next move is whether you can afford to keep the current home and switch this to an investment property.  Make sure any extra savings are put in a separate redraw account so the debt against the principle place of residence can be tax deductible in the future if the asset is going to convert to an investment property” says Suzy.

Refer to the repayments calculator to work out the monthly repayment costs based on your loan amount. 

Saving can help—but there’s opportunity cost

Then there is the third method of funding a house move. And that’s “old-fashioned saving,” Suzy says.

This is the route many first-home buyers take when getting their deposit together, and it can also be beneficial when you upgrade to your next home.

The danger of the old-fashioned savings route, compared to the other methods, is the potential opportunity cost of waiting. “Saving up the cash to fund an upgrade move can take several years and, if you do that, you run the risk that the value of the property you want to buy is increasing all the time,” Suzy explains. “Using your home equity or another borrowing method can help you make that upgrade sooner, ensuring that you don’t miss out.”

Upgrading to a new and improved home is an exciting time, but many people don’t calculate the true cost of their move and can find themselves caught out financially. In understanding the costs involved, you can start your new home adventure on the right foot.

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