Once you’ve made it on the property ladder, it’s tempting to upgrade your home, especially if you’ve had to compromise on where you live, or on the type of house you’re in.
Should you use your equity to buy a bigger home? Our answer is it’s not as simple as that!
Finance Is King
If you buy before selling, bridging finance can be expensive and hard to get. Bridging loans are when the bank finances your new home and your existing home until the latter is sold. For example, if your mortgage is $400,000 and you buy a new home worth $700,000, for a short period of time your mortgage will be $1.1 million, and you will need to make repayments on that amount.
We find the average lifespan of a bridging loan is around three months, so you need to be prepared. You will also need insurance on both properties, in case of the worst-case scenario (like an earthquake) and both homes are damaged. It’s also important to remember the final price for your home might be lower than expected, potentially leaving you with a more significant mortgage than anticipated. So be conservative on your numbers.
Homes aren’t selling as quickly as they were a few months ago, so you may need to sit tight and wait for a sale. Buyers could also be in a ‘chain,’ therefore settlement may not be quick.
Selling then Buying
If you sell your home, before purchasing another, where will you live? The regional rental market is particularly tricky, with not many houses available and increased competition from renters.
Our advice is to make sure you have somewhere to go in between and be prepared to wait! Can you find a buyer for your place who is happy to wait until you have found a new house?
Ideally, you will be a cash buyer, which could give you a competitive advantage over others.
Is trading up worth it?
Do you really need to take on extra debt? Is it worth sacrificing ‘gains’ on your current home? Do you need a bigger or newer home?
We encourage all our clients to ask themselves these questions. 30 percent equity in your current home could be worth only 15 percent in your new home. What about the additional mortgage repayments? Can you afford it? Once again consider what kind of lifestyle you want to lead.
If you’re keen for more room, extending or renovating your home is a fantastic option to consider, particularly if you’re happy where you are but are just looking for a bigger or more modern, space.
Working with a mortgage broker from the start will help answer all these questions when they pop up and we can guide you in making the best decisions for you and your family. If you want our advice on trading up, call us now 0800 000 517.