Relocate or renovate?
Reporter: From a finance perspective what factors could influence a homeowner’s decision to either renovate or relocate?
Martin Beanland: The first key questions are whether it’s the suburb, the street, or the property which aren’t meeting the homeowner’s current needs. If they like the current area then the consideration turns to how much their property needs have changed. Sometimes it’s typically bathrooms and kitchens that need an upgrade. However, if the need changes from a unit to a house, or into a better neighborhood, then it becomes a financial consideration to assess the financial viability of such a change. This includes selling and buying costs, as well as the higher purchase price.
Reporter: How can a mortgage broker help a person who may be thinking of renovating or relocating?
Martin Beanland: Most clients appreciate the expertise of a mortgage broker to look at several options when considering to relocate or renovate. This normally starts with a complimentary planning session. Because the broker understands the costs to buy and sell and also the property buying/selling cycle, it is a powerful exercise to explore the options in detail. That helps the client understand the steps in the process, and how to transition from the current situation to the desired end-state. Common questions include “what are the costs of each option, do I have enough deposit, will the banks approve my request, and how much will the loan repayments be?” Example: It costs about 3% of the property value to sell and 5% to buy, so there would be a cost of around $58,000 to sell a $600,000 home and also buy a $800,000 home. Plus the clients loan would be $200,000 higher. Whether this is more desirable than a renovation often comes down to the loan repayment numbers.
Reporter: Are there any specific products related to renovating?
Martin Beanland: Many clients who wish to renovate have built equity over time. For example they might have a home loan of $300,000 and their property is worth $600,000. When borrowing up to a total of 80% of the property value, it’s generally straight-forward to obtain up to $100,000 top-up funds with minimal fuss as long as this work is for non-structural renovations such as landscaping, pools, kitchens and bathrooms. If the renovation is a more major (structural) change this would need a council approval and normally a construction loan is required. For a construction loan, the lender needs to see a fixed price building contract with plans and specifications for the build. Many lenders can value the property “as completed” which can be helpful in terms of qualifying for the loan.
Reporter: Are there any specific products related to buying a second (or subsequent) home?
Martin Beanland: Many lenders offer relocation loans, which are also known as bridging loans. This is a product where the client can buy first, and settle on the purchase before selling their home. Relocation loans are generally only a 6 month term, so the client must sell their existing home in this time. The income qualifying is usually on the expected final loan amount (after the sale). To qualify for a relocation loan, the client needs to have built up equity in their current home - that is, they need a much smaller loan than their existing property is worth. For example, if their home is worth $600,000 and their current home loan is $200,000, and they are buying for (say) $900,000, then in the short term they would have their existing $200,000 loan plus the $900,000 loan for the new purchase plus extra funds for selling and buying costs as well as spare funds to pay for repayments for 6 months. Another option to buy a subsequent property is to buy the new property as an investment property, or convert the current home to an investment property. This may be possible if the client earns enough to qualify for the full loan amount of the current and future loans. Investment property rent can be included as income in this scenario..
Reporter: What advice would you give someone who is weighing up whether to renovate or relocate?
Martin Beanland: Plan well and plan early. I’d start by identifying the problems or shortfalls in your current property or suburb, and define the “must haves” and the “like to haves” in terms of your future property. If your current home has good bones but shortfalls, get a builder to advise you what’s possible and perhaps give you a planning quote on the perfect solution and a compromise solution. Have a planning meeting with your mortgage broker to review the options to relocate or renovate, and see what’s viable. What is the bottom line repayment dollar for each option, and is this achievable and within your budget?. Talk about the steps in each process, and how these will impact on your life in both a positive and negative way. It’s great to have a list of all the features and benefits that are important to you - list the key property features (like size, functional spaces, storage, garaging, quality of bathrooms and kitchen) but don’t forget to add things like lifestyle needs and location (family, schools, work, sports, hobbies, transport links). Good luck.