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Upgrading your home: should you sell or keep your current property?

By Emma Smith

If you’re upgrading your home should you sell your existing one? Or could you afford to keep it as an investment property? We explore the key factors to keep in mind when you’re making the decision to keep or sell.

You’ve made the decision to buy your next home. Now the next step is to decide what to do with your existing property. Is selling the smartest choice? Or should you hold on to your current home as an investment property? We explore the alternatives.

Benefits of selling your property

The main benefit of selling is that you may end up with a concrete amount of money to work with when it comes to buying your next place. This allows you to make a fully informed decision about what you can afford and how large your next mortgage will be.

Example: Selling to buy

Let’s say you sell your existing home for $800,000 and you have a $200,000 mortgage. That should leave you a gross profit of $600,000. If the home you want to buy is $1 million, you’ll need to borrow the balance, as well as cover the cost of:

  • real estate agent’s commission to sell your existing home
  • stamp duty on your new purchase
  • legal and conveyancing fees on the sale and purchase
  • pest and building inspections
  • repairs and maintenance on your new property
  • moving costs.

So, depending on which State you’re in, that means you may need to borrow as much as $465,000 to secure your new home.

Benefits of keeping your home as an investment property

If you held onto your current property as an investment, it could give you the benefit of ongoing rental returns and tax deductions, as well as a capital gain over time.

Can you use equity to buy your next property?

Equity is the difference between the current value of your home and the amount you still owe on your mortgage. You can use this equity to help your buy your next home if you don’t decide to sell.

To do this you’ll need to get a professional valuation on your current home, then approach your home loan provider to see how much you can borrow against your existing property.

Example: Keeping your home as an investment property using equity

If you decide to hold onto your existing home, you’ll need to borrow the full value of the new property and stamp duty for a total loan of around $1,065,000. While that may sound like a lot more money, you need to remember that you now own $1.8m worth of property.

Depending on what your lender allows, you should also have the option of spreading your loan across both properties you own. That’s important because it means the tenant in your old home is helping meet the cost of your mortgage repayments through rental income. This may be enough to meet the entire cost of the loan over your old place, depending on how you structure it.

Alternatively, if there is a shortfall, it means your investment property is negatively geared and you may be able to offset your loss against your tax bill.

Remember to take into account Lenders Mortgage Insurance

Because you’ll now own two properties and you’re borrowing more money your loan-to-value ratio (LVR) will increase. If your Loan to value ratio dips below 80% on either your new or existing loan that may mean you need to pay Lenders Mortgage Insurance (LMI) and you’ll have to factor this into your costs also.

If you’re increasing your borrowing on your current home, you’ll also have to go through a new credit application process when you take out your new loan, even if you already have a loan over your current home. Speak to your lender about any extra considerations if you change your home into an investment property.

Set up a budget to help you decide

Putting together a realistic budget is a key factor in helping you decide whether to set up an investment property. Along with all your regular expenses, make sure you take into account:

  • Loan repayments on your new property, as well as on your current one.
  • Projected rental return on your investment property
  • The cost of employing a property manager.
  • Ongoing maintenance costs for both properties.
  • Insurance on both properties

You should also consult your tax adviser about the tax implications of both decisions. Generally, selling your home (if it is your principal place of residence) may mean you’re exempt from capital gains tax (CGT). However, if you decide to keep your current home as an investment property you may have to pay CGT proportionally at the time you sell it.

It may also be wise to get your current home valued before you rent it out, as well as any fixtures and fittings as you could be able to claim any depreciation in these for tax purposes once it becomes an investment property.

Buy first or sell first?

If you do decide to sell your home, you’ll also have to make a decision about whether to do it before or after you buy your new property.

Selling first is the traditional strategy as it means you have a concrete budget to work with. Buying first can make sense in a competitive market, where you’re confident your property will sell. However, because you’re now funding two properties you may need to pay for bridging finance until you’ve sold.

And finally…

Making the right decision is a question of balancing local real estate market factors with your own financial needs and goals. Take the time to talk with your bank as well as experienced real estate agents in your area about how the market is moving before you make your final call.

Article reproduced with permission from

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, REA recommends that you consider whether it is appropriate for your circumstances. REA recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.

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