Top tips to upgrade your family home in Hawthorn

Upgrading your family home in Hawthorn typically involves either refinancing to purchase a larger property or borrowing additional funds against your current home to renovate. Both pathways require careful consideration of your borrowing capacity, loan structure, and the impact on your repayments.

Hawthorn's established housing stock, proximity to quality schools, and median property values make it a common location for families looking to upsize as their needs change. The decision often comes down to whether you renovate the home you're in or sell and purchase something larger, and both decisions hinge on what you can borrow and at what cost.

How borrowing capacity changes when you upgrade

Your borrowing capacity is determined by your income, existing debts, living expenses, and the loan amount you're seeking. When upgrading, lenders reassess these factors to determine how much additional debt you can service. If you've had salary increases or paid down other debts since your last application, your capacity may have improved. If household expenses have risen or you've taken on additional commitments, it may have contracted.

Consider a buyer who purchased a two-bedroom apartment in Hawthorn five years ago and now needs a three-bedroom house closer to Auburn Primary School. Their income has increased, and they've reduced the original loan balance, but childcare costs and a car loan now appear on their expense profile. The lender recalculates serviceability based on the current position, not the original approval. The difference between what they could borrow then and what they can borrow now determines whether the upgrade is feasible without selling the apartment or whether they need to transition to a single larger loan.

Loan structure options for upsizing

When upgrading, you can structure the loan as a single owner-occupied home loan secured against the new property, or retain the existing property and structure part of the debt as an investment loan. The latter applies when you're keeping your current Hawthorn home as a rental and purchasing a new property elsewhere. If you're selling your current home to purchase a larger one, the transaction is typically structured as a new owner-occupied home loan with the sale proceeds applied as your deposit.

A split loan structure can also be useful during an upgrade. This involves dividing the loan amount between a fixed rate portion and a variable rate portion. The fixed component provides repayment certainty during a period when expenses may be rising due to a growing family, while the variable portion allows for additional repayments without penalty. This structure is common among Hawthorn buyers upgrading from apartments to houses, where the loan amount increases significantly and managing repayment risk becomes a priority.

Using equity to fund renovations instead of moving

If you choose to renovate rather than move, you can access equity in your current home to fund the works. Equity is the difference between your property's current value and the amount you owe on your mortgage. Lenders typically allow you to borrow up to 80% of the property's value without incurring Lenders Mortgage Insurance, though this depends on your serviceability and the purpose of the funds.

In a scenario where a family owns a period home in Hawthorn valued in the mid-range for the suburb and owes a moderate amount on the existing loan, they may have sufficient equity to borrow an additional sum for a renovation without selling. The funds are drawn down as needed during construction, often structured as a construction loan or line of credit, and then consolidated into the main loan once the works are complete. The updated property value post-renovation can also improve the loan to value ratio and provide further flexibility for future borrowing.

Fixed rate, variable rate, or split

The choice between fixed and variable interest rates affects both your repayment stability and your flexibility to make extra repayments. A variable rate home loan allows you to make additional repayments and access features like an offset account, which can reduce the interest charged on your loan. A fixed rate provides certainty over a set period, which can be valuable if you're managing a tight budget during the upgrade. A split loan combines both, allowing you to lock in part of the loan while retaining flexibility on the remainder.

Hawthorn buyers upgrading to larger homes often opt for a split structure given the higher loan amounts involved. This allows them to manage the risk of rate movements while still making progress on the variable portion if their cash flow allows. The split ratio depends on individual circumstances, but a common approach is to fix a portion that covers essential repayments and leave the rest variable for accelerated repayment or offset benefits.

Offset accounts and paying down your loan faster

An offset account is a transaction account linked to your home loan. The balance in the offset account reduces the amount of interest charged on your loan without requiring you to make additional repayments into the loan itself. This provides flexibility to access those funds if needed while still reducing your interest costs.

For families upgrading in Hawthorn, an offset account can be particularly useful during periods of fluctuating expenses, such as school fees or childcare costs. Funds can be held in the offset to reduce interest, then drawn down when required, without affecting the loan structure or requiring a redraw application. This feature is typically available on variable rate loans or the variable portion of a split loan, and the benefit increases as the offset balance grows.

Timing your sale and purchase to avoid holding two properties

If you're selling your current home to fund the purchase of a larger property, timing the settlement dates is a key consideration. Ideally, the sale of your existing home and the purchase of the new home settle on the same day or within a short period. This minimises the time you're either without a home or holding two properties and paying two sets of costs.

When timing doesn't align, bridging finance can be used to cover the gap between purchasing the new property and receiving the sale proceeds from the old one. This is a short-term loan secured against both properties, allowing you to settle on the new purchase before the sale completes. Bridging finance typically has a higher interest rate and is structured to be repaid as soon as the sale settles, so it's used only when necessary to secure a property or avoid rental costs during the transition.

Pre-approval and making your offer with certainty

Obtaining home loan pre-approval before you start looking at properties gives you certainty about how much you can borrow and makes your offer more credible to vendors. Pre-approval involves a lender assessing your financial position and confirming they are willing to lend you a specific amount, subject to property valuation and final checks.

In Hawthorn's tightly held housing market, where quality family homes attract multiple offers, having pre-approval in place allows you to act quickly when the right property becomes available. The approval is typically valid for three to six months, giving you time to find a property without needing to reapply. This also allows you to focus your search on properties within your confirmed borrowing range, rather than making offers subject to finance on properties that may be outside your capacity.

Understanding loan to value ratio and LMI

The loan to value ratio is the percentage of the property's value that you're borrowing. If you're borrowing 80% or less of the property's value, you typically avoid Lenders Mortgage Insurance. If you're borrowing more than 80%, LMI is usually required, which is a one-off cost that protects the lender if you default on the loan.

For buyers upgrading in Hawthorn, the LVR calculation depends on the equity available from the sale of their current property and any additional savings. If the sale proceeds provide a deposit of 20% or more of the new property's value, LMI is avoided. If the deposit is smaller, LMI is added to the loan amount or paid upfront. Some buyers choose to pay LMI to access a property sooner rather than wait to build a larger deposit, particularly if property values are rising or if the right property becomes available.

If you're considering upgrading your family home in Hawthorn, whether through purchasing a larger property or renovating your current one, a detailed review of your borrowing capacity and loan structure is the first step. Call one of our team or book an appointment at a time that works for you.

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