Upgrade or Renovate?

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Homeowners are discovering that the grass isn’t always greener on the other side, and in doing so are choosing to renovate rather than upgrade.

December quarter ABS figures indicate there was a rise in renovations, with work done on major alterations and additions growing by 2.5% in the December quarter to post a 6.3% rise for 2010.

Housing Industry Association senior economist  Andrew Harvey says the trend could represent a reluctance by home owners to upgrade to new houses.

"Renovations continue to be popular as Australians are increasingly look to improve their existing homes rather than face the mounting transaction costs, such as stamp duties, that they will incur if they trade up to another property," Harvey said.

Cost of Upgrading

Upgraders are looking at additional costs of tens of thousands of dollars above the purchase price – depending on the value of the new property, its location and the size of deposit. As a rule of thumb, upgraders can expect to pay about 5% of the purchase price in transaction costs.

The biggest costs upgraders face are:

  • stamp duty
  • lender’s mortgage insurance (if applicable)
  • conveyancing
  • establishment fees
  • agents fees
  • pest and building inspections
  • moving costs

Stamp duty costs
vary from state to state – in NSW, a property valued at $650,000 (assuming homebuyers have a 20% deposit of $130,000) will cost $25,335 in stamp duties, whereas a property of similar value (and deposit) in Queensland will cost $16,624 in stamp duties.

Stamp duties are applied on a sliding scale, so homebuyers with more expensive properties are charged more.

The homebuyers in the above example would be exempt from paying lenders mortgage insurance, as they have a 20% deposit, but those under that magic number will face an additional charge.

Lenders mortgage insurance, or LMI, covers the lenders’ risk should the borrower default on their loan. The amount of this cost is determined by your loan to value ratio, the size and type of loan and your credit score. For instance, borrowing $450,000 on a $500,000 property would cost the borrower $8815 in LMI - a cost which is paid upfront.

Upgraders also face the cost of conveyancing, which varies in cost depending on the conveyancer and the complexity of the transaction. The average cost is $1550.

Mortgage establishment fees also vary depending on the lender and the amount you borrow and cover the cost of setting up a mortgage. They currently cost up to $700.

When buying and selling a home you will also be faced with estate agents’ fees. Commissions run from 2% and 8% on the sale price.

The costs associated with pest and building inspections depend on the size of the property and can run anywhere from $200 for a single-fronted terrace to about $1,000 for a larger property. A pest inspection costs around $100.

And lastly, moving costs can run from $500 to $5000 depending on whether you hire professional removalists, or rent a trailer and do-it-yourself.

Other fees that exist: body corporate fees, council rates, utility costs, legal fees, transfer fees and property valuation costs.

Costs of renovating

In comparison to the costs associated with upgrading, renovating your house can seem like the more affordable option.

However shortages of skilled trades people, the rising costs of materials and stringent occupational health and safety requirements have all pushed up costs.

To ensure that costs don’t blow-out, you need to make a budget and stick to it. Have a clear idea of what you want to achieve and get written contracts from tradespeople. You also need to consider any costs that may be involved should the renovations force you out of your home and into a hotel, or serviced apartment for a short time. 

And whatever you do, don’t overcapitalise. You could end up losing more money in the long-term if you spend more than the house will be valued at once the project is finished.


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