Upgraders‌

Here‌ ‌are‌ ‌the‌ ‌4‌ ‌essential‌ ‌elements‌ ‌to‌ ‌buying your next ‌home‌.

Upgrading to a better home is surprisingly similar to buying your first home.

There’s the same uncertainty about how much you can borrow and how much you can afford to pay for a home.

I can help clear up your confusion.

How? By walking you through the process we use, helping you understand your options, and providing expert advice every step of the way.

There are four pieces of the puzzle we need to work through:

  1. Borrowing power – How much money will the bank lend you?
  2. Contribution – How much is your current home worth and how much equity can you access?
  3. Purchasing power – How much money can you pay for the new property?
  4. Capacity – How much debt are you comfortable carrying?

Together, we will work through the process so we can get clear on all four elements. Please note, that these elements work together, rather than follow one after the other.

Borrowing Power

1

Contribution

2

Purchasing power

3

Capacity

4

This is about understanding how much a bank will lend you. you may have tried one of those onlinemortgage calculators, these calculators will give you a very rough guess of your borrowing power, based on your income and an estimate of your living expenses. But it is no more than a very rough guess, because the calculators won’t factor in your personal spending habits, savings history, credit card use, HECS debt and other liabilities.

Additionally, your employment situation affects your borrowing power. Full-time or part-time workers with consistent incomes may have greater borrowing power than contractors or self-employed workers with inconsistent incomes. The same can be said for casual employees as lenders look at this income differently as well.

Finally, your borrowing power can vary significantly from lender to lender – sometimes by tens of thousands or even hundreds of thousands of dollars (yes, really).

So, as you can see, there are many variables that influence your borrowing capacity, and therefore what you can afford to buy.

When we get together, I’ll look at all these variables, so I get a complete understanding of your unique circumstances, this is the first step

Want to understand your real borrowing power? Click here to book an appointment.

‘Deposit’ is the word a lot of people use, but it can be a confusing because it can mean two different things. First, when it comes time to buy your property, you will need to pay a 10% deposit as part of the Contract of Sale. Next, a lender will expect you to have a deposit before as part of getting a loan. What deposit are we talking about?

That is why I like to bundle everything in together and call it ‘contribution’. It is your equity, your savings, maybe a gift from your parents.

If you were buying your first home, we would be focusing on your savings. But for upgraders, the key to moving on to a better home is generally your equity so I am going to spend some time

Equity

Equity is the value of your current property minus your outstanding mortgage.

There are two ways you can access your equity:

  • Sell your home.
  • Keep your home and borrow against the value.

1. Selling your home

This is the simplest way to access your equity. Your equity is whatever is left over after you’ve sold the home, paid the sales costs and paid out the mortgage. Even if these sound like it could be expensive, it is the way to access more of your equity and there are no strings.

The reason I say this is because you can get the most money, and you can get it in cash.

To illustrate the point, let’s imagine you sold your current home for $600,000. We will assume your sales costs were $18,700 – real estate agent’s fee of $13,200 (based on 2.2% commission), marketing costs of $3,000 and conveyancing costs of $2,500. And let’s assume your outstanding home loan is $300,000. In that case, your available equity would be $281,300.

Want to understand how much your home is worth? Click here to find out.

2. Keeping your home and borrowing against the value

If you keep your current home, you can’t access your equity in cash – you can access it only by borrowing.

Lets look at how you would do this as the separate components:

  • Your current loan on your current property (which would switch to an investment loan)
  • An Equity Loan where you borrow against your current home, access the equity to use to fund the deposit on your new property.
  • A new mortgage on your new property (which would cover the rest of the property purchase).

Remember, the property was valued at $600,000, which means 80% of the property’s value would be $480,000. There was $300,000 left on the mortgage, which means the available equity would be $180,000.

 

NEED IMAGE HERE

 

In this example the $180,000 is your “Equity Loan” and this is then funds avaliable to purchase the new home.

Yes, it is possible to borrow up to 90% of the value of your home, in this case we then need to factor in the Lenders Mortgage Insurance (LMI) fee into the equation.

Summary:

You can see that if you sell your home, you have a contribution of $281,300

If you keep your home, you only have access a contribution of $180,000

The difference of $100,000 can have a significant impact on the home you can afford.

Should you keep your current home when you upgrade? Click here to see the pros and cons.

If we combine your total Contribution and your Borrowing Power this can simply combine to understand your Purchasing Power, it can sometimes be a simple beautiful thing as it all comes together and it just works.

But other times it can require more juggling. If we first look at the approximate value of the home you want to buy in your preferred area… we then work backwards and see how that fits with your borrowing power and Contribution or Equity.

It may turn that you need to borrow more money than you expected. What are then focusing on is the repayments on the required loan.

This is an important process to follow. We understand what the bank will lend you, we understand how much equity you have avaliable and looked your deposit – now we need to understand how much you want to repay. Once it all comes together, you will feel confident and be ready to upgrade to your next home.

If you want to begin to understand your purchasing power download the upgrading calculator now.

Once you know how much you can borrow, how much you feel comfortable borrowing, how much of a contribution you’d make to your loan and how you’d pay it, you’re ready to calculate your purchasing power.

Purchasing power refers to the maximum amount you could spend (and would be willing to spend) on the land and building your new home. It may not quite be the right word when you are renovating your existing property, but hopefully you get the point.

It’s the final figure and includes all associated costs to give the full picture of that is possible.

For example, when you renovate, you’re not just paying for construction labour and materials. There are other costs, such as hiring an architect, lodging a development application, and applying for a loan.

When you build, you might have all those costs plus stamp duty, conveyancing, and valuation.

Once we have worked through all four pieces of the puzzle, we can start talking about lender options and finding a loan and lender suited to your unique circumstances, and then apply for a pre-approval on your behalf.

Ready to start planning your renovation or construction project?

Your capacity to repay a mortgage is unique to you. It doesn’t matter what capacity your friends and colleagues have, because their financial situation is different to yours.

And, to some extent, it doesn’t matter what the bank says, if, for example, the bank says you have capacity to repay a $1 million loan but you only feel comfortable with repayments that show you can will only borrow $900,000.

In other words, when you’re upgrading to a bigger and better home, capacity is a very personal thing.

First, you need to understand all the expenses you’d have to pay. That would include larger mortgage repayments and the costs of maintaining a larger home. And it would also include all the costs you currently incur, from groceries and petrol to family holidays and school fees.

Next, you need to understand whether you can afford all these expenses.

Ready to start planning your upgrade? Download this calculator

Want to know the best way to understand whether you can afford all the outgoings associated with upgrading? Start living that way now.

For example, when you work through the calculator your mortgage repayments are likely to rise by $1,000 per month. So, start contributing an extra $1,000 to your mortgage right now. If your home maintenance costs are likely to rise by $250 per month, add that extra $250 to your mortgage as well. (If you’re not allowed to make additional payments on your mortgage, you can pay those extra funds into a separate savings account.) This strategy has four benefits:

  • You understand your capacity.
  • You save on interest.
  • You increase your equity.
  • You build good habits.

Ready to start planning your upgrade? Book an appointment.

FREQUENTLY ASKED QUESTIONS

Yes.

A lot of people assume lenders will pay no attention to their credit card if they don’t use it (i.e. because it’s a source of emergency funds) or pay it off in full each month.

However, even in those scenarios, lenders look at your credit card limit… Why? Because the evidence shows that when homeowners get into financial stress, they often use their credit card to make purchases and/or take out cash advances.

When you applies for a mortgage, lenders generally assume they’ll make monthly credit card payments equivalent to 3% of the card’s limit – i.e. $150 per month if the card has a $5,000 limit.

In other words, the higher your credit card limit, the lower your borrowing power.

Are bridging loans good or bad? Click here to see the pros and cons of bridging loans.