Understanding the basics of buying a larger home

Moving from a two-bedroom apartment to a house with a backyard is one of the most common reasons couples refinance or upsize.

The decision usually happens when your current space no longer fits your life. Maybe you're expecting, or you've outgrown working from the dining table, or you just need somewhere to put things that isn't under the bed. Whatever the trigger, the financing side involves either selling your existing property and buying something larger, or keeping what you have and turning it into an investment while you purchase your next home. Both paths require different loan structures, and both come with trade-offs you'll want to understand before you commit.

Should you sell your current property or keep it as an investment?

The answer depends on how much equity you have and whether you can service two mortgages. If your current property has increased in value since you bought it, you may have enough equity to use as a deposit on your next home without selling. If you don't have enough equity, or if servicing two loans would stretch your budget too far, selling is usually the clearer option.

Consider a couple who bought a unit in Oakleigh three years ago for $550,000 with a 10% deposit. They now owe $450,000, and the property is worth around $620,000. They have $170,000 in equity. If they want to buy a house for $900,000, they'd need a deposit of at least $90,000 to avoid Lenders Mortgage Insurance, plus another $30,000 to $40,000 for stamp duty and settlement costs. They could borrow against the equity in their unit to cover those costs, but they'd also need to demonstrate they can afford repayments on both the existing loan and the new one. If their combined income is $140,000, that might work. If it's closer to $100,000, the numbers probably won't stack up, and selling becomes the more practical choice.

Keeping your first property as an investment can help you build wealth over time, but only if the rental income covers most of the loan repayment and you're comfortable with the cash flow gap. If you're already planning to start a family and one income might drop or disappear for a while, that gap can become a problem quickly.

How does borrowing capacity change when you're buying a larger home?

Lenders calculate how much you can borrow based on your income, existing debts, and living expenses. When you already own a property, that calculation becomes more complex. If you're keeping your current home as an investment, the lender will assess the rental income you'll receive, but they won't count all of it. Most lenders only include 80% of the expected rent to allow for vacancy periods and maintenance costs. They'll also add the full loan repayment on that property to your existing commitments.

If you're selling, the lender will usually assess your borrowing capacity without including your current mortgage, provided settlement on the sale happens before or around the same time as your purchase. If there's a gap between selling and buying, you might need a bridging loan to cover the period where you own both properties.

Your deposit size also affects how much you can borrow. If you're using equity from your existing property, the lender will want to see that your total borrowing across both properties doesn't exceed 80% of the combined property values, unless you're willing to pay LMI. Some lenders are more flexible than others on this, particularly if you have a strong income and a clean credit history.

What loan features matter most when upsizing?

An offset account is one of the most useful features when you're moving to a larger loan. Any money sitting in the offset reduces the interest you pay on your mortgage, which can make a real difference when your loan amount jumps from $450,000 to $800,000. If you're keeping your first property as an investment, you'll want an offset linked to your owner-occupied loan, not the investment one, because owner-occupied interest isn't tax-deductible.

Portability is another feature worth checking. If you're selling your current home and buying a new one, a portable loan lets you transfer your existing loan to the new property without breaking your fixed rate or losing any negotiated discounts. Not all lenders offer this, and some charge a fee even when they do, so it's worth confirming before you assume it's automatic.

Split loans can be helpful if you want the certainty of a fixed rate on part of your borrowing and the flexibility of a variable rate on the rest. If you're upsizing during a period when rates are shifting, locking in a portion of your loan can give you some predictability around repayments while still allowing you to make extra payments or redraw from the variable portion.

How do you structure the loan if you're keeping your first property?

If you're turning your current home into an investment, you'll need to split your lending across two loans: one for the property you're keeping and one for the property you're buying. The loan on your investment property should be interest-only if possible, because the interest is tax-deductible and you want to maximise that deduction. The loan on your new owner-occupied home should be principal and interest, because you're not getting a tax benefit and you'll want to pay it down over time.

You'll also want to avoid cross-collateralising the two properties unless there's no other option. Cross-collateralisation means using both properties as security for both loans. It can make it harder to refinance or sell one property later without the lender's involvement in both. Keeping the loans separate gives you more control, even if it means slightly higher rates or a smaller borrowing amount in the short term.

If you're borrowing more than 80% of the value of your new home, you'll likely need to pay LMI. Some lenders offer no LMI loans for certain professions or in specific circumstances, but in most cases, if your deposit is less than 20%, LMI applies. The premium is usually added to your loan amount, so it increases both your borrowing and your repayments.

What happens to stamp duty and government concessions when you already own property?

Once you've owned a home, you're no longer eligible for first home buyer concessions, even if you've sold that property before buying your next one. That means you'll pay full stamp duty on your new purchase in most states. In Victoria, stamp duty on a $900,000 home is around $50,000. In New South Wales, it's closer to $35,000. Those costs need to be factored into your deposit, or they'll reduce the amount of equity you can use from your existing property.

If you're planning to keep your first home as an investment, you'll also need to notify your lender that the property is no longer owner-occupied. Investment loans typically have slightly higher interest rates than owner-occupied loans, so your repayment on that property will increase even if the loan amount stays the same. You'll also need to arrange landlord insurance and make sure the property meets rental standards in your state.

You won't qualify for schemes like the Australian Government 5% Deposit Scheme or Help to Buy when purchasing a larger home if you already own property, as these are designed specifically for first home buyers or those who meet very specific eligibility criteria around prior ownership.

Should you fix, split, or stay variable when upsizing?

The loan structure that makes sense depends on your financial situation and how long you plan to stay in the new property. A variable rate gives you flexibility to make extra repayments and access features like offset accounts and redraws. A fixed rate gives you certainty around your repayments, which can be helpful if your income is about to change or if you just want to know exactly what you'll be paying each month.

A split loan lets you do both. You might fix 60% of your loan for three years at a set rate and keep 40% variable so you can make lump sum payments or redraw if you need to. If rates drop, you benefit on the variable portion. If they rise, you're protected on the fixed portion. The downside is that managing a split loan is slightly more complex, and some lenders charge separate fees for each portion.

If you're keeping an investment property, the rate type you choose for each loan can be different. You might fix your investment loan to lock in your deductible interest expense and keep your owner-occupied loan variable so you can pay it down quickly. There's no single right answer, but the structure should match your goals and your tolerance for rate movement.

Call one of our team or book an appointment at a time that works for you. We'll look at your current position, the property you're targeting, and the loan structure that gives you the most flexibility without overextending your budget.

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