If you’re an existing homeowner and you’re considering trading up to a larger or more expensive property, you’re likely familiar with the process of securing a mortgage. However, trading up presents a unique set of challenges and considerations. Whether you’re upgrading to a bigger home for your growing family, looking for more space, or simply seeking a change of scenery, understanding the mortgage process can help smooth the transition and ensure you’re making the best financial decision.
In this article, we’ll explore the key aspects of obtaining a mortgage when trading up, including the current market conditions, the process of securing a loan, and tips to ensure a successful transaction.
Housing Market Dynamics
Ireland’s housing market continues to experience a supply-demand imbalance, contributing to rising property prices. House prices have increased by approximately 9.6% over the past year. The Central Bank forecasts a need for 52,000 new homes annually until 2050 to meet demand, a target that has been challenging to achieve.
1. Understanding the Trading Up Process
“Trading up” in Ireland refers to selling your current home and purchasing a new, typically more expensive property. This is common for people whose circumstances have changed, such as needing more space for a growing family or wanting to live in a different area. While the general process of securing a mortgage when buying a new home is familiar, trading up involves a few additional considerations.
Firstly, you’ll need to establish the value of your current home. Most homeowners have built up equity over time, which can be used as a deposit for the new property. Equity is the difference between what your home is worth and what you owe on your mortgage. If you’ve been in your home for a while, you’re likely to have significant equity, which can ease the process of financing your new property.
However, in today’s market, property prices have risen, and competition is fierce, so even if you have equity, you might need to secure additional financing to cover the cost of a more expensive home.
2. Assessing Your Mortgage Eligibility
Before you start looking at new properties, it’s important to assess how much you can afford to borrow. Mortgage lenders typically lend up to 3.5 times your gross annual income, though this ratio can vary based on the lender and individual circumstances. The Central Bank’s mortgage rules also require that buyers have a deposit of at least 10% for properties worth up to €500,000.
When trading up, the lender will assess both your existing mortgage and your ability to manage a higher monthly repayment. This means that the outstanding balance on your current mortgage will be factored into the loan amount for your new home. If you have a sizeable amount left on your current mortgage, you may need to borrow a larger sum to cover both the balance of your old loan and the new property.
3. Getting Your Property Valuation
This is less relevant than previously, because these days auctioneers will not entertain a bid from a buyer who NEEDS to sell their own house before they can buy the new house. Meanwhile, Bridging finance is difficult to get and very expensive.
If you are keeping the existing home while buying a new home a solution could be to obtain a ‘split mortgage’. In this case you will get 2 mortgages for the total – a variable rate for the amount of finance your old home will pay off, and a fixed rate for the amount for the amount of finance you intend to pay off from your monthly income.
4. Mortgage Products for Trading Up
Mortgage Options and Lender Competition
The Irish mortgage market is becoming increasingly competitive, with new entrants like Revolut planning to offer mortgage services in 2025. This competition is expected to provide borrowers with more options and potentially better rates.
The European Central Bank (ECB) has been reducing its main deposit rate to stimulate the eurozone economy, leading to lower mortgage costs. As of October 2024, new mortgage rates have decreased to 4.03% from a peak of 4.31% in March. Projections suggest that further ECB rate cuts could bring mortgage rates down to around 3% in 2025.
There are various mortgage options available for those looking to trade up, including fixed-rate and variable-rate mortgages. The right choice for you will depend on your financial situation and long-term goals.
• Fixed-Rate Mortgages: Fixed-rate mortgages offer the stability of a fixed interest rate for a set period, typically 3, 5, or 10 years. This can be helpful when budgeting, as your monthly repayments will not fluctuate with interest rate changes. However, it’s important to note that fixed-rate mortgages may come with higher initial rates compared to variable rates.
• Variable-Rate Mortgages: Variable-rate mortgages are more flexible, with interest rates that can change in response to market conditions. These rates may be lower initially, but there’s a risk of rates increasing in the future. If you’re comfortable with some degree of uncertainty, a variable-rate mortgage could be an attractive option.
Additionally, some lenders offer flexible mortgages, which allow you to make overpayments or pay off lump sums without penalty. This could be beneficial if you plan to make additional payments on your mortgage once you sell your current home.
5. Selling Your Current Home
Selling your current home is a critical part of trading up. You’ll need to consider the timing carefully. Ideally, you want to sell your current property and secure the proceeds before committing to the purchase of a new home, although this isn’t always possible. Some people choose to have a bridging loan to cover the gap between selling and buying, but these loans come with higher interest rates and should be approached with caution.
Before listing your home, you should ensure that it is in good condition and presentable for potential buyers. This could involve making repairs or improvements to increase its value. Additionally, getting a professional valuation can help you set the right asking price and avoid over- or underpricing your property.
6. Additional Considerations for Trading Up
• Stamp Duty: Stamp duty is a tax that applies when purchasing a property. For properties under €1 million, the stamp duty rate is 1% of the purchase price.
• Capital Gains Tax: If you sell your existing home, and it has increased in value, you may need to pay Capital Gains Tax (CGT) on the profit. However, if the home has been your primary residence, you may be exempt from this tax under the principal private residence relief.
• Legal Fees: Both selling and buying a home involve legal costs. A solicitor will assist in managing the conveyancing process, including drafting contracts and ensuring that all legal requirements are met.
Steps to Secure a Mortgage When Trading Up
1. Financial Health Check: Review your financial situation, including income, expenses, and credit history, to determine your borrowing capacity.
2. Property Valuation: Obtain a current valuation of your existing property to estimate the equity available for your next purchase.
3. Mortgage Approval in Principle (AIP): Seek an AIP from lenders to understand how much you can borrow, which will guide your property search.
4. Consult a Mortgage Broker: Engaging with a mortgage broker can provide access to a range of mortgage products and professional advice tailored to your circumstances.
Government Support Schemes
While many government schemes target first-time buyers, some may be accessible to those trading up. It’s advisable to research current programs to determine eligibility and benefits.
Trading up can be a rewarding move, but it’s essential to approach the process with a clear understanding of the mortgage options available, the potential costs involved, and how the current market conditions might impact your ability to secure financing.
By assessing your finances, seeking professional advice, and taking the time to find the right property, you can ensure a successful transition to your new home. Remember to shop around for the best mortgage rates and terms, and don’t hesitate to ask your lender or mortgage broker for guidance as you navigate this exciting next step in your homeownership journey.