Could a Falling Property Market Make Upgrading Your Home More Affordable?
When property prices fall, most homeowners focus on one thing:
“My home is worth less than it was before.”
That reaction is understandable.
But if you are thinking about upgrading, there is another side to the story.
The home you want to buy may also have fallen in value.
And if the property you are moving into has fallen by more than the property you are selling, the cost of upgrading may actually have improved.
That can affect more than just the purchase price.
It can also reduce the size of the mortgage you need, the stamp duty you pay and the overall cost of the move.
For homeowners who have been putting off an upgrade, it may be worth running the numbers again.
Here are three things to consider.
The gap between your current home and your next home may be shrinking
For an upgrader, the most important number is not always what your current home is worth.
It is the difference between what you are selling and what you are buying.
For example, imagine your current home was previously worth $1.5 million and the home you wanted to buy was worth $2.5 million.
That is a $1 million price gap.
Now imagine both properties have fallen in value.
Your current home may now be worth $1.425 million, while the property you want to buy has fallen to $2.25 million.
The gap has reduced to $825,000.
So even though your own property has fallen in value, the cost of moving into the next property has fallen by even more.
That is why looking only at the value of your current home can sometimes give the wrong impression.
For an upgrader, the better question is:
“What does the whole changeover look like today?”
A lower purchase price can reduce more than just the price of the home
A lower purchase price can flow through to several other costs.
Depending on your circumstances, it may mean:
- a smaller mortgage
- lower stamp duty
- less interest paid over time
- a lower deposit requirement in dollar terms
- and potentially more manageable monthly repayments
For example, on a $2.5 million purchase, the loan and purchase costs can be significantly higher than on a $2.25 million purchase.
That difference can have a meaningful impact on your cash flow and the amount of debt you take into the next stage of your life.
This is where it helps to look beyond the headline property price.
Sometimes the benefit of a softer market is not just buying for less.
It is that the total cost of upgrading can come down as well.
Your existing equity may go further than you think
Many homeowners have built up substantial equity over time.
That equity may come from:
- paying down the home loan
- previous property growth
- or a combination of both
If you are thinking about upgrading, that equity can potentially help fund:
- the deposit on the next property
- stamp duty and purchasing costs
- part of the changeover amount
- or reduce the size of the new loan required
This is important because a falling market does not automatically mean your ability to upgrade has gone backwards.
You may still have significant equity in your current home.
And if the property you want to buy has also fallen in value, that equity may stretch further than expected.
The key is to calculate the full picture:
Current property value
minus existing home loan
minus selling costs
equals available equity
Then compare that with:
New purchase price
plus stamp duty and costs
minus available equity
equals the new funding requirement
That is the number that really matters.
A falling market does not automatically mean your plans need to stop
There is no doubt that softer property values can feel uncomfortable.
But if you are both selling and buying in the same market, the impact can look very different from simply watching the value of your existing home fall.
The upgrade may become more affordable.
The borrowing requirement may reduce.
The buying costs may come down.
And your existing equity may still be doing more work than you realise.
Of course, none of this means you should upgrade simply because prices have fallen.
The new mortgage still needs to be comfortable.
You still need to allow for higher interest rates, living costs, selling expenses and the financial buffer you want to keep.
But if upgrading has been on your mind, this may be a good time to revisit the numbers.
At Kredi, we can help you work through:
- the likely sale proceeds from your current property
- your existing loan balance
- your available equity
- the new purchase price
- stamp duty and other costs
- the amount you may need to borrow
- and what the new repayments could look like
Before putting your upgrading plans on hold, it may be worth understanding what the real changeover cost looks like today.
You may be surprised by how much the equation has changed.