Case Study: The upgrading journey – using finance to make upgrading your home as simple as possible

Tim & Sophie are Melbourne locals – born and bred.  They bought their first home in Melbourne in 2010 and had lived in it for 6 years.   Tim & Sophie were blessed with two little children over their 6 years at their Essendon property.  They decided to explore the opportunity to upgrade their existing home to a larger house in a better school catchment, but wanted to do it as seamlessly as possible.

Tim & Sophie wanted to sell their existing home rather than holding onto it as an investment.

The details:

• House Price: $840,000
• Location: Eastern Melbourne
• Purchase date: December 2016

Finance considerations:

With two little ones quickly growing, Tim & Sophie wanted the process to be as simple as possible.

Their immediate priority is to purchase the new property, settle in & pay the loan down over the next 4-5 years.  Tim & Sophie have no current or future plans to invest in property.

Finance plans:

Our goal was to find a solution that would ensure Tim & Sophie can move into their new home, while keeping their stress & hassle to a minimum.

While upgrading the family home, there’s usually a few ways purchases can be structured:

1. Bridging loan option – this option would allow Tim & Sophie to buy before selling their existing home. However, it comes at a hefty loan mortgage insurance fee.  Bridging loans involve having two properties at the same time for a temporary period.  This meant a high temporary loan to value ratio above 80% and a mortgage insurance fee of above $7,000!

• Assets:
  1. Existing home value: $550,000
  2. New property value: $800,000
• Total ‘asset position’ for temporary period: $1.35mill
• Liabilities:
  1. Existing loan: $250,000
  2. New ‘bridging loan’ required for temporary period: $850,000 ($50,000 to cover costs of purchasing).
  3. Total ‘liability position’ for temporary period: $1.07mill

This was not a suitable solution – $7,000 for a temporary period certainly adds stress!

Buy & Sell on the same day – this option would mean that Tim & Sophie will line up the purchase of the new home settlement date, with the sale of their home. This invariably can be stressful managing multiple settlements & having a forced position of settling on the same day.  Tim & Sophie noted that this will drastically hurt their negotiation power as they would likely require a longer settlement period & many sellers in their favourite suburb weren’t willing to do this. Given the stress levels & consequences involved, this also wasn’t an ideal solution.

Sell first, rent temporarily & buy again – here Tim & Sophie would need to move twice.  First into a rental property & then into their home.  While this would take the pressure of selling within a certain date, they immediately ruled this option out.

Buy first, sell after – Similar to a bridging option, Tim & Sophie had the borrowing power & equity available to purchase their new home first & then sell their existing property in their own time later. Here Tim & Sophie would have the option of turning their old home into an investment before selling, or selling right away.

• In this option, we set up an equity release against their own home. It was valued at $550,000.  The bank would provide up to $440,000 without any mortgage insurance fees ($550,000 x 80%).   This allowed for a $190,000 equity release, with thier existing loan of $250,000 remaining.
• Tim & Sophie used this $190,000 as the deposit for their purchase.

Results:

This allowed Tim & Sophie to buy first, sell in their own time & do it all without paying any mortgage insurance fee.  They saved themselves over $7,000 in fees by structuring their finance appropriately to meet their goals.

Tim & Sophie were very happy come auction day for their own home – their house sold for $40,000 above their $550,000 reserve.  A nice little gift to help Tim & Sophie lower their ongoing mortgage!

Here’s what Tim & Sophie had to say about dealing with Confidence Finance

We’re so glad our friends referred us to Redom & Curtis. We actually went into our local broker before our family friends told us to talk to Redom. While he was friendly and supportive, he simply presented a series of loan options to us. Redom & Curtis literally saved us thousands by coming up with a clear plan, a series of actions & then delivering the right loan results to solve our upgrading issue.  Turns out their innovative thinking solved our problem.  At first we were a bit hesitant dealing with a Sydney firm, but it turns out talking to experts & the right people was far more rewarding than dealing with less knowledgeable people.  I couldn’t recommend the team at Confidence more highly – in fact I’ve already told my family all about Redom & Curtis.