Upgrading Your Family Home: The Pros and Cons

When Your Borrowing Capacity Limits the Upgrade

Your borrowing capacity determines whether you can upgrade at all, and whether you need to sell before you buy. Lenders assess your capacity by applying a serviceability buffer of at least 3 percentage points above the loan product rate, meaning a variable rate home loan at 6.2% is tested at 9.2% or higher. If you're holding your current loan while applying for a second, both repayments are counted in full even if you plan to sell within weeks of settlement.

Consider a community pharmacist earning $115,000 a year who owns a home with a $420,000 loan balance and wants to upgrade to a property requiring a $750,000 loan. If the existing loan repayment is around $2,800 per month and the new loan would require roughly $5,000 per month at the test rate, the combined servicing load may exceed the lender's maximum DTI threshold or fail the expense coverage test. The sale proceeds would clear the existing loan and release that servicing capacity, but only after settlement on the old property. In that scenario, most lenders require the current home to be unconditionally sold, with a confirmed settlement date, before approving the new loan. Some lenders allow conditional approval with a subject-to-sale clause, but rates and product access may be less favourable.

If you're relying on sale proceeds to fund the deposit on the new home, you'll need a contract of sale on the existing property before you can exchange on the upgrade. That often means selling first and renting temporarily, or negotiating a longer settlement period on the purchase to allow time to sell. Bridging finance is another option, though it carries higher rates and requires you to service both loans simultaneously for the bridging period, which may be several months depending on market conditions. You can read more about bridging loans for pharmacists if you're considering that structure.

Using Equity Without Selling

If your current property has increased in value and your loan balance has reduced, you may have enough equity to fund the deposit on the new home without selling. Lenders generally allow you to borrow up to 80% of the property value without LMI, or up to 90% or 95% with LMI depending on your profession and lender policy. Pharmacists may have access to LMI waivers on loans up to 90% LVR with certain lenders, which can reduce upfront costs when accessing equity.

As an example, a property valued at $800,000 with a remaining loan of $350,000 provides $290,000 in accessible equity at 80% LVR. That's calculated as 80% of $800,000, which is $640,000, less the existing loan balance of $350,000. If the deposit and costs on the upgrade property total $180,000, the equity alone may be sufficient without needing sale proceeds. The existing property can then be retained as an investment, with rental income offsetting some or all of the loan repayment.

Retaining the property does mean you'll be servicing two loans, and lenders will assess your capacity accordingly. Rental income is typically shaded by 20% to account for vacancy and maintenance costs, so a property renting for $600 per week contributes roughly $480 per week to serviceability. The loan on that property still needs to be serviced in full at the test rate. If the numbers work, this structure allows you to build a portfolio while upgrading your family home. More detail on this approach is available on the buying your next home page.

Converting Your Home to an Investment Property

When you move out of your owner-occupied home and retain it as an investment, the loan structure doesn't automatically change. The interest rate, offset account and redraw facility all remain as they were. What does change is the tax treatment: loan interest becomes deductible against rental income from the date the property is first available for rent, and you begin paying land tax if your total investment property holdings exceed the threshold in your state.

You'll also need to notify your lender that the property is no longer owner-occupied. Most lenders require written notice and may adjust the interest rate to an investment rate, which is typically 0.10% to 0.30% higher than the equivalent owner-occupier rate. Some lenders reclassify the loan administratively without changing the rate if the loan was originally taken out as owner-occupied and you've held it for a minimum period, but that's not universal. If you don't notify the lender and they discover the change during a review or audit, they can recall the loan or apply penalty rates.

From a CGT perspective, your main residence exemption applies for the period you lived in the property. Once it becomes an investment, any capital gain accruing from that date is subject to CGT when you eventually sell. You can choose to treat the property as your main residence for up to six years after moving out, provided you don't claim another property as your main residence during that time, but that election only defers the CGT liability rather than eliminating it. If you're holding multiple properties and considering expanding your property portfolio, the timing of that election and the sequencing of sales can materially affect your tax position.

Timing the Sale and Purchase

Selling before you buy removes the risk of holding two properties during a slow sales period, but it also removes certainty about where you'll be living. If you sell with a standard 60-day settlement and haven't secured the new property, you'll need temporary accommodation unless you negotiate a post-settlement occupancy agreement with the buyer. Those agreements typically run for a maximum of 90 days and require you to pay the buyer a daily occupation fee, plus you lose control over the property and take on additional liability.

Buying before you sell gives you more control over the upgrade property and removes the pressure to settle quickly, but it requires enough borrowing capacity to service both loans and enough liquid funds or equity to cover the deposit and costs without relying on sale proceeds. Some buyers use a subject-to-sale clause in the purchase contract, which makes the purchase conditional on selling the existing home by a specified date. That structure protects you from being locked into two properties if the sale falls through, but sellers are often reluctant to accept a subject-to-sale offer unless the market is slow or your property is already under contract.

If you're buying in a rising market, delaying the purchase to sell first may mean the upgrade property increases in price faster than your sale proceeds grow. If you're selling in a falling market, holding both properties may mean the sale price drops while you're waiting for the right buyer. Neither scenario is predictable, so the decision often comes down to your risk tolerance and how much buffer you have in your borrowing capacity and savings. Getting loan pre-approval on the new property before listing your current home gives you a clear view of your borrowing capacity and helps you set a realistic price range for the upgrade.

Fixed, Variable or Split Rate on the New Loan

The loan structure on your upgrade property affects your repayment flexibility and your ability to make extra repayments or access redraw. A variable rate loan allows unlimited extra repayments and typically includes an offset account, which can be useful if you're holding surplus cash from the sale of your previous home or building up savings between settlement and the next purchase. A fixed rate loan locks in your repayment for the fixed period, usually one to five years, but limits extra repayments to a capped amount per year and generally does not include an offset account.

A split loan divides the balance between fixed and variable portions, giving you partial rate certainty while retaining some offset and repayment flexibility on the variable portion. In our experience, pharmacists upgrading their family home often prefer a split structure with 50% to 70% fixed, particularly if they're managing both an owner-occupied loan on the new property and an investment loan on the old one. That allows them to offset rental income or other cash holdings against the variable portion while maintaining a known repayment on the fixed portion.

If you're refinancing your existing loan at the same time as taking out the new loan, consider whether a single lender can offer the rate and features you need across both loans, or whether splitting the loans between two lenders gives you access to lower rates or higher LVR limits. Some lenders offer portfolio pricing, which applies a rate discount when you hold multiple loans with the same institution, but that discount is only worthwhile if the base rate is already close to the lowest available. You can review your options through a loan health check before committing to a particular structure.

Deposit Requirements and Upfront Costs

Most lenders require a 20% deposit to avoid LMI on an owner-occupied home loan, though pharmacists may be able to borrow up to 90% or 95% LVR with reduced or waived LMI depending on the lender. If you're accessing equity from your existing property, the available equity is treated as your deposit. If you're selling first, the net sale proceeds after repaying your existing loan, agent fees, legal costs and any early exit fees become your deposit.

Upfront costs on the new property include stamp duty, legal fees, building and pest inspections, loan application fees, valuation fees, and mortgage registration fees. Stamp duty varies by state and can be significant on higher-value properties. First home buyers upgrading from a unit to a house are no longer eligible for first home buyer concessions, so you'll pay standard rates. In NSW, stamp duty on an $850,000 property is roughly $33,000. In Victoria, it's around $45,000. Those costs need to be funded in addition to the deposit, so your total cash requirement is often 22% to 25% of the purchase price when buying without LMI.

If you're using a deposit smaller than 20%, LMI is calculated on a sliding scale based on the loan amount and LVR. The premium is a one-off cost that can be capitalised into the loan or paid upfront. On a loan of $680,000 at 90% LVR, the LMI premium may be around $18,000 to $25,000 depending on the insurer and lender. That's a material cost, and it's worth comparing whether paying a larger deposit to avoid LMI, or accessing a profession-based LMI waiver, results in a lower overall cost. More detail on low deposit loans for pharmacists is available if you're working with a deposit below 20%.

Call one of our team or book an appointment at a time that works for you to discuss your upgrade and get a clear view of your borrowing capacity, equity position and loan structure options.

Frequently Asked Questions