COMMENT: If you’ve owned a house for more than a couple of years, chances are that you have made money on your property through capital growth. Houses have increased in value by double-digit percentages in the past year alone. With this new-found equity, how do you go about moving to a better or more-suitable home? If you are looking to upgrade your home, here are some things to think about for your mortgage.
1. Are you moving cities?
You can often buy a much better home in a smaller city for about the same price - which is why Tauranga and Nelson are doing so well. If you are planning on moving cities, the number one question to answer on your mortgage application is: “How are you going to earn your income after you move?” If your employment will continue as normal, that’s great. But if you have to find new employment, that may make getting a mortgage more difficult. And if you are self-employed, show the bank clearly how you can continue your business without significant loss of revenue.
2. Do you need to sell your current home before buying?
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Bridging finance is when you need to purchase your new home slightly before your old home is sold. An “open bridge” means you don’t know when your old home will be sold. A “closed bridge” means you have a date for your old home to sell (usually as a result of an unconditional offer) but you need to buy your new home before that date.
Closed bridges are significantly easier because there is low risk for the banks. In a hot market like this, however, don’t be afraid to investigate open bridges. Even if it costs you $20,000 in additional costs, open bridges give you good flexibility for purchasing the house you want. Think of it this way: if the additional cost of an open bridge is $20,000 and you are purchasing your new home for $2.1 million, would you have paid $2.12 million for the house? Odds are you would have, so build the cost into the transaction.
NB: Bridging finance works particularly well if the house you’re selling is desirable (e.g. it’s aimed at first home buyers or has amazing views). If your house has quirks such as plaster cladding or unconsented works, it may pay to avoid open bridging finance.
3. Is keeping you current house as a rental a good idea?
Buyers with a lot of equity might consider keeping their old home and renting it out to tenants. I’d encourage serious investigation before you decide. Houses that you have lived in aren’t always as hardy as they need to be for tenants, particularly if you live in a suburb that has a lot of families with young children. Additionally, you may be able to get higher rent elsewhere. Even though the cost of selling your house might be a one-off agent’s fee, it might be worth selling if you can get better rental return every year going forward.
Although “movers” are selling and buying in the same market, they are often in a much better position than when they last bought a house. As people age, they pay down their mortgage and tend to earn higher wages. They tend (on the most part) to spend less frivolously and not take on as much secondary (Credit Card) debt. Buyers looking to move will often find that getting a mortgage for their upgrade is significantly easier than their first home. In addition, New Zealand is experiencing the lowest interest rates in history and it seems that if you’re looking for that slightly larger house, section or garage, a hot market is a prime time to sell your existing house and find your forever home.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
