Upgrading your home is a significant lifestyle decision that will have a considerable impact on your quality of life. However, it is also a critical financial decision. Making informed choices can greatly enhance your financial position, while mistakes can be costly and impede your ability to build wealth.

  1. Approach the Decision with an Investment Lens

While we don’t typically buy homes with a financial motive, a home can be a wonderful investment for several reasons. Homes tend to be aspirational, meaning we often stretch our budgets to buy in desirable areas. We also tend to hold onto homes for many years, benefiting from compounding capital growth. Additionally, the primary residence capital gains tax (CGT) exemption makes any capital growth tax-free.

By applying an investment lens, you can choose a home that not only meets your lifestyle preferences but also serves as a sound investment. Investment-grade properties are typically in desirable locations, are appealing and liveable, and have good floor plans and proximity to amenities. Prioritizing properties with strong investment potential allows you to enjoy both lifestyle benefits and financial gains.

  1. Be Realistic Yet Ambitious

It’s wise to stretch your comfort zone and borrow more to afford a higher-quality home, but avoid overextending yourself to the point where it hinders your ability to invest in other assets. Minimizing home loan borrowings can force you to compromise on important property aspects. Instead, maximize your borrowing capacity to purchase the best quality property you can afford, which will likely maximize future capital growth and equity. However, ensure your home loan repayments don’t consume most of your income, preventing you from investing in other assets and securing your retirement.

  1. Assess Whether to Retain Your Existing Home as an Investment

Emotional attachments to your current home can cloud judgment. Not all homes make good investments. Assess factors such as borrowing capacity, loan-to-value ratios, and cash flow. Often, selling your existing home is more efficient. If retaining it as an investment is viable, seek independent advice to objectively evaluate if the property has sufficient positive attributes to be investment-worthy.

  1. Buy First, Sell Later

Selling your home before finding a new one creates uncertainty and the risk of being without accommodation. It’s more convenient to sell after moving out, avoiding the stress of preparing for open houses. When buying first, ensure you have realistic expectations about your home’s sale price and assess your financial means to acquire a new property. Options include using your income and equity to purchase without selling immediately, considering bridging finance (noting the higher interest rates), or seeking family support. Ideally, aim for a long settlement period on the new home and align sale and purchase dates closely.

  1. Assemble a Skilled Team

Upgrading your home involves numerous factors requiring input from various professionals. Consult a mortgage broker to determine borrowing capacity and explore bridging finance options. A financial advisor can help establish a suitable borrowing budget that aligns with your long-term retirement plan. Your tax agent can advise on the tax implications of converting your current home into an investment property. A reputable buyers’ agent is invaluable for purchasing a high-quality home and optimizing the sale of your existing property.

  1. Maintain Objectivity

Emotions can impact financial decisions, especially regarding your home. A buyers’ agent can balance your lifestyle attributes with investment fundamentals, ensuring you find a home that meets both. They provide unbiased advice on property presentation, pre-sale improvements, timing, and agent selection, reducing stress and helping maximize your net sale proceeds. Engaging a reputable buyers’ agent is highly recommended to achieve optimal long-term financial outcomes.

  1. Buy Low, Sell High

While selling your home during a strong market and waiting for a market cool-down to buy can be tempting, this strategy is risky. Re-entering the market with confidence is challenging and you may miss opportunities. Conversely, selling in a soft market can be disappointing, but buying your upgraded home during such a market means paying less than in a robust market. Timing the market is inherently difficult. Aim to buy and sell within the same market conditions to mitigate risks and maintain balance. Don’t try to time the market.

Life-Changing Decisions

Investing more than initially considered reasonable in upgrading your home can be one of your best investment decisions. It will likely enhance your quality of life and boost your net worth through tax-free capital growth. Upgrading your home is one of the most important decisions you’ll make in your lifetime. Make it wisely, balancing lifestyle preferences with sound financial planning.