I see many clients that move from house to house throughout their lifetime and they do that for various reasons.
The house is too small for a growing family, they need to be closer to schools and transport, or maybe they want to live in a different area. All are legitimate reasons however if you stop and assess what its costs to move house each time, you may think twice and consider staying put.
So what is the actual cost of moving house? Well beyond the emotional strain placed on people when they move let’s look at the ‘Hard Costs’ by taking a sale of an average home in Sydney and Melbourne of say $1,000,000 and then assume an upgrade to a new house worth $1,500,000.
Firstly we have to contract an agent to manage the sale of our existing property and he will generally charge you around 2% plus GST so that’s approximately $22,000 (2.2% of $1,000,000).
Now lets take the Stamp Duty on the purchase on the new property of 1.5m (using NSW stamp duty) would be approx. $69,000.
Legal fees for your lawyer to handle settlement would be say $2,000.00.
Other associated costs say $5,000.
Total cost upfront to move house in this example is approximately $100,000 which leaves us now with only $900,000 to buy a house worth $1,500,000 assuming there is no debt.
On top of this we may now need to borrow $600,000 to make up the gap ( $900,000 – $1,500,000) and let’s assume an interest rate of 5%, therefore the interest would be $30,000 p.a.
Lets keep it simple and look at the cost of simply staying put and renovating . Lets assuming it will cost you $500,000 to renovate your existing home to an equivalent standard of what you need.
Borrowings required of $500,000 @ 5% = $25,000 in interest p.a compared to $30,000 interest p.a if we moved. That is a saving of $5,000 pa over 20 years = $100,000 saving.
But let’s say we could also unlock equity by borrowing that extra $100,000 we have saved by renovating our existing home and by staying put and then used that extra amount as a deposit on an investment property worth say $500,000.
Example: Purchase another investment property with the $100,000
- $75,000 – 15 % borrowings plus costs (We had a saving of $100,000 by staying put and renovating and assume $25,000 in acquisition costs leaving $75,000 for a 15% deposit on the investment property).
- $425,000 – 85% Borrowings from bank (Assume mortgage insurance).
- $25,000 – borrowings costs of purchase.
- $525,000 – purchase price, costs and and total borrowings for investment property.
Let’s now calculate the cost of holding this investment property over time, assuming a Net rental return of 4%.
- Net Rent – $20,000 ( $500,000 @ 4%).
- Interest on loan – $26,250 ($525,000 @ 5%).
- Net tax deductible loss – ($6,250) pa assume 46% tax rate actual cash loss after tax claims = ($3,375.00 pa ).
Remember we would have saved $5,000 pa by staying put and renovating for $500,000 and not borrowing $600,000 to move house which means from a cash flow perspective we are better off by $1,625.00 pa net of tax savings ($5,000.00 – $3,375.00).
Assuming after renovations the property value base is $1,500,000 plus, we have another Investment property of $500,000 that gives us a $2,000,000 capital base with better cash position to fund it.
Assuming that the property value will double every 10 year principle applies, in 20 years your asset base of $2,000,000 has increased to $8,000,000 ( $2,000,000 x 2 = $4,000,00 x 2 = $8,000,000) compared to if you had moved a potential capital base of $6,000,000 ($1,500,000 x 2 = $3,000,000 x 2 = $6,000,000).
These numbers above are approximates and just a means of an example and I do realise that there would be variables, but the point I am trying to make is that you should carefully consider the long term cost before you decide to move house. I appreciate we all have personal reasons for wanting to move but you need to be aware from a financial point of view that it may not be the best outcome and could cost you hundreds of thousands if not millions over a 20 year period.
These numbers are only to provide an example, always seek professional advice on your personal situation before making any Investment decision’s.
Founder & Non Executive Chairman – Chan & Naylor Accountants
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