Upgrading Your House and Where to Start

If you have pondered upgrading your existing house, then you have probably thought through the scenarios without really knowing what is possible or knowing the best option for your circumstances.

Upgrading your house is probably one of the more complex things to do. Do I buy before I sell, do I sell before I buy, do I offer on a house subject to sale of our existing, do I rent the existing and buy new, do I get pre-approved for additional lending first?

If you do sell before you buy, have you got somewhere temporary you can live? How does that affect your kids and pets? Will the market prices move after you have sold?

Probably the least risky option is selling (unconditionally) before you buy. This helps make you a ‘cash’ buyer on the new house (make sure you have lending approved if needing to borrow more money to upgrade). Sometimes you can accept an offer on your place with a long settlement date to minimise needing temporary accommodation. You could also consider a vendor clause that gives you time to find a new house, though this won’t suit most buyers.

If the market is moving upward, be careful your buying power is not eroded by trying to get back into a higher market than when you left.

Another low-risk option, but more onerous, is to buy a new property subject to unconditional sale of your existing house (amongst other due diligence conditions).

An offer on a house subject to house sale can sometimes be viewed as a ‘weak’ offer in a busy property market, but when things are a bit slower (like they have been recently), they are more common. Houses can take time to prepare to sell, so if you are considering an upgrade, start thinking about getting your house ‘sale ready’ now.

If the market is hot, you probably want to buy before you sell, BUT open bridging finance can be risky, expensive and difficult to get. Banks will be conservative on the expected sale price of your house and want to see you have access to surplus cash (think 6 months’ worth of floating interest costs), plenty of equity across the two houses, and a solid healthy income. You are also assessed on the ‘end result’ lending once your property sells. So hence a lower value might be used in the assessment in case you sell your house for a lot less than expected. This is quite common in the current environment. Of course, if you have unconditionally purchased a house prior to selling yours, that does put you under immense pressure sometimes to accept an offer that you would normally not have accepted. Be aware also that some banks have limited to no appetite for open bridging finance.

One scenario I often see is renting out the existing house and 100% financing the purchase of an upgraded house. This can seem a great solution and convenient, but do the numbers stack up? You are now about to become a landlord/property investor, so is the existing house a good investment? For example, would you have bought it as a rental property if you had never lived there? What sort of rental return will it give you and how much will you have to top up any shortfall every week from your personal income. This can also significantly increase your debt position depending on the existing debt (if any) and new debt needed.

The obvious hurdle is finance, how do we make it all work from a finance perspective? Talking to a Craig Pope Mortgage Adviser first is highly recommended. If you need to borrow more money to upgrade your house, it pays to be pre-approved for that first. A Mortgage Adviser will review your situation and run through what you can and can’t do, including the pros and cons of each option mentioned above. Each bank will view things differently so seek independent advice.