Essential financial questions you should ask before upsizing
The need for a bigger property comes to all homeowners at one stage or another. It might be that single life has come to an end and you and your partner are buying your first home together. It could be that you need to accommodate a growing family, or maybe you are retirees who need more space now that you’re both at home together all day and more space is needed for new hobbies! Whatever the reason, upsizing to a bigger property is a significant financial commitment, so it’s important to ask yourself some key questions before you take the leap into something bigger.
1. Why are you upsizing and what are your long-term financial objectives?
If you fall into one of the categories above, then you probably have given it good consideration . Your short-term objective is obviously to solve your immediate challenge, but you should consider the long-term opportunities the property may (or may not) offer too. If you’re just making space for the family and they’ll all be grown and gone in ten years, what will your plans be for that big property after that? If you retire to a big home, do you have contingency plans for the property and your alternative living arrangements as you grow older? With the correct floor plan, the home will suit you well into the future.
If your reasons for upsizing are not about practicalities, but purely about investment opportunity, then you need to be clear about the financial implications of your decision. Will the capital gains over a reasonable period of time be significant enough to make the investment and additional expenses involved worthwhile?
2. How much can I afford to borrow?
Stricter lending guidelines have been implemented in recent times so you may be surprised to discover that your borrowing power has diminished considerably. Preparing yourself to simply apply for a loan may reveal the writing on the wall, before you’ve even called to book the appointment. First you need to be sure you have enough equity to support your home loan application as well as proof of stable income to meet the necessary repayments. Online mortgage calculators are all well and good for first home buyers, but they offer far too general a picture if you are already concerned about whether your loan request may be denied. The basics of borrowing still apply – how much do you need, how much do you have, what do you earn, how much do you spend, who else do you support, how much can you pay each month. But in addition, you should review your entire financial situation with a professional and make any adjustments that may be required, to investments, debts and even your banking. Sitting down with a financial advisor may be a wise decision before you take the next step.
3. What additional costs should I expect?
A bigger house increases not only the space you own but also your expenses. Your new mortgage payments will of course be larger than either the rent you were paying before, or your mortgage on your smaller property. On top of the mortgage you will have increased bills for things like rates, utilities, property taxes and insurance. There will also be removalist’s costs. Two bathrooms mean more towels, extra bedrooms mean more beds and pillows and linen, extra windows need more curtains and so on. Finally let’s not forget the joy that is stamp duty and mortgage insurance.
4. Can my budget support the running costs of a bigger property?
Hopefully you answered this question for yourself earlier – when you were preparing to apply for a home loan. A larger house requires much more work to take care of than a smaller property. Ongoing routine maintenance as well as the kind required when random things go wrong all cost money that you need to have available in the event of emergencies. If a water pipe is going to explode, it will almost always happen on a weekend – the most expensive call out time for tradespeople. The ongoing stuff should not be overlooked either. A neglected property will not retain its value and things left undealt with will be costlier to fix later, if left to fall into disrepair. In addition, homes with swimming pools, high maintenance landscaped gardens, leafy surrounds that attract possums and rats, deciduous trees that create leaf litter, multiple rooms that attract dust and bugs, can often become a millstone around your neck. In making calculations, do some research and get prices for tradespeople who can help you carry the load. Paying a gardener to take care of the lawn and the weeds may cost you, but it might also be the best money you’ll spend. If the numbers don’t work, think seriously about how much the hidden costs may be and if it’s all really worth it.