How to Use Equity to Upgrade the Family Home

Upgrading your family home is exciting. Your family is growing, and your dream home is becoming more of a reality. Whether you’re choosing to use the equity in your property to renovate or pay for a deposit for your new home, there are plenty of options available that our expert team of mortgage brokers can assist with. Read on to learn how you can use equity to upgrade the family home. 

Purchasing options

Ideally, purchasing a new home would be simple. Unfortunately, this isn’t always the case. Let’s look at purchasing options for those looking to use equity as a deposit for their next home. 

Bridging loan

It can be tricky to get the timing right when you’re on the hunt for a new home. Do you sell your home first and then purchase? Or do you purchase first before you sell your home? While the latter might seem the ideal solution, it doesn’t always work with finance – especially if you’re relying on funds from selling your home to purchase your next home. Temporarily moving out of your home into short-term accommodation or a parent’s house is a major deterrent for families. However, a bridging loan or relocation finance allows you to purchase and settle on a new place before you have been able to sell your existing home.

A bridging loan can help avoid the stress of matching up settlement dates. Essentially, it lets you purchase your new property without having to sell your existing property first. A lender will work out the size of the loan by adding the value of your new home to your current mortgage and then subtracting the likely sale price of your property. This option means no moving back in with your parents!

Simultaneous settlement

As the name suggests, simultaneous settlement refers to when the settlement of your new and previous home coincides. If both transactions settle at the same time, there are significant benefits. These include:

• Only needing to move once (this will save time, removalists costs, storage costs, etc.).
• You won’t need to seek alternate accommodation (saving on rental fees).
• The loan for your existing home can be refinanced and replaced with a loan for your new property.
• Arrangements can be made to disconnect and reconnect services in your new home.

This option needs to be timed perfectly, as delays with one transaction can affect the other. Likewise, if the other buyers/sellers of the involved properties experience delays, this can cause a domino effect if issues arise.

A simultaneous settlement requires careful planning and the assistance of a skilled mortgage broker. Our team of experts can help you with this purchasing option.

Sell first, purchase later

Selling first and purchasing later is a great option for those who want to know exactly how much money they will have for their next home. Other potential benefits for selling your home first include:

• Having funds readily available.
• Not needing to rush the sale of your property.
• No need for a bridging loan.
• More appealing to vendors as you’re not relying on your home to sell to have finance approved.

However, there are potential downsides to selling first, which include:

• Rising property prices between the time you sell and buy mean you could spend more than anticipated.
• Potential relocation or rental costs.

Guarantor loans

Another option for purchasing your next home is a guarantor loan. Guarantor loans are great as they let you avoid lender’s mortgage insurance (LMI) while getting you into the market sooner. Having a guarantor co-sign a portion of your loan means that they agree to repay your debt if you default on your loan.

To learn more, read our blog on guarantor loans.

Renovation options

If your current home is a fix-upper or you want to use equity to extend, renovation options might be the best option.

Minor home non-structural

Minor non-structural renovations are for those not wanting to move but who are keen to give their current home a face-lift. A lender can increase your home loan to fund invoices for non-structural home improvements such as landscaping, painting and flooring.

Structural

Any structural changes you wish to make to your home (including full knockdowns) require a construction loan. This loan allows you to borrow against the value of your property, with the lender considering the estimated value of the property after renovating.

Can I use equity to upgrade the family home/renovate?

If you’ve been in your home for a while, you may have built up some equity that can be used in a number of ways. If this is the case, a home loan increase may allow you to leverage the equity you have in your property to fund renovations. An equity release can only be taken out on more established homes where equity has had time to build up. It’s important to note that equity can only be used for non-structural renovations.

Should I sell or rent?  

When it comes to your home, there are no right or wrong answers. Choosing to sell or keep your home as an investment property is a personal choice and often comes down to your financial position and goals.

Key considerations

 Some key considerations when deciding whether to sell or rent include:

• If the bank will approve your loan for multiple properties.
• What your cash flow situation is, and if you have a safety net in place if you can’t find a tenant or lose your job.
• If you can use equity in your existing home to pay the deposit for another.
• The tax implications of owning an investment property.
• Your financial goals and whether owning multiple properties lines up with these goals.

 Can I use equity to buy another property?

If you’ve built up equity in your property over time, you may be eligible for an equity release. This means you can withdraw equity from your current property to pay the deposit for another. If you choose to do this, it’s important to allow 4-6 weeks to have the funds so you’re not short when the deposit is due.

Home loan structure 

How your home loans are structured is crucial to ensure you have the most control over your finances and for the ease of lodging your tax returns each year. Weighing up the pros and cons of renting vs selling is a great way to see the implications of each before deciding.

To find out more, read our blog on selling vs renting.

If you’re looking to use the equity in your home to upgrade your family home – either through renovations or purchasing – get in touch with one of our experienced team members today.