If you’re lucky enough to have owned a house for at least a couple of years, you’ve almost certainly gotten richer through capital growth. With a hot property market nationwide, median house prices have increased nearly 20% in just the last year. A house bought a year ago for $500,000 could now sell for $700,000, meaning some homes have earned more in the last year than their owners did. Putting aside feelings of inferiority that your house earned more than you by literally just sitting there, you may be thinking of using your increased equity to move to a better home. If so there are a few things to think about.
Very possibly! When you go to sell your house you are probably in a better position than when you first bought it. If you have owned it for a decent length of time you’ll have paid down your mortgage and will (hopefully) be earning higher wages. You have likely learned better money habits and have less secondary debt (ie credit cards, car loans). If this is the case, getting a mortgage for an upgrade will be much easier than it was getting one for your first home.
Moving to a cheaper area means you get a nicer property for the same price, no mortgage increase required. Think Hawke’s Bay, Taranaki or Gisborne, the wider Canterbury region or the West Coast. If you are applying for a mortgage to buy in a different city you need to be able to prove your income will remain stable; if you can keep your current job great, if you have to find a new job getting a mortgage will be more difficult. If you are self-employed you will need to show the bank how your business will continue to supply you with enough income to support your mortgage. See How to Move Cities When You Have a Mortgage.
The banks can provide you with bridging finance to allow you to purchase your new home before selling your existing one. This allows you to buy when the right property comes along, rather than being under time pressure to purchase somewhere prior to the settlement day for your current property.
A couple of key terms:
Closed bridge loans have a lower risk for the banks so are easier to get than open bridge loans.
During the period of a bridging loan you are paying interest on both your original mortgage and your bridging loan. This brings additional cost but gives you the flexibility to be in a position to buy the house you want, not just the house that was available within a tight timeframe. Build the cost into the budget you have to spend on your new house.
Open bridging finance works wonderfully if the property you’re selling is likely to get lots of interest (e.g. it’s picturesque, ideal for first home buyers or is in a great neighbourhood). If your house has red flags for buyers such as plaster cladding or a leasehold title you may find it is on the market for a lot longer than other houses in your area, resulting in a large cost to service both the mortgage and the bridging loan.
If you have enough equity you might consider keeping your old home and renting it out to tenants. This needs to be thought through as often a house that you bought to live in isn’t necessarily going to be the best investment property. An investment property is ideally a hardy and easily maintained one, with a good rent vs mortgage yield and in an area that looks ripe for capital growth. Although there is a cost to selling your house to buy a different property, it can pay off if you can get a better rental return and/or better capital growth.
Note: A rental property must meet the government’s Healthy Homes Standards.
Let’s not forget that interest rates are at an all time low. While that is no reason to take on debt that you can’t service at a higher interest rate, it does mean upgrading now is cheaper than it has ever been before. So whether you’re thinking it’s time the teenagers got their own living room (you really don’t want to have to argue about TV channels anymore), or you would love a bigger garden or a house with a scullery, now could be a great time to make the move. Talk to a Mortgage Lab Mortgage Broker today to find out what your options are.
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