Sell first, buy first or get a bridging loan?
Are you looking to move to a new home?
Whether you’re upgrading or downsizing, you’ll need to decide if you’ll buy the new home first or sell your existing home.
This can be quite tricky as most people don’t want to sell until they’ve found a new house and many can’t buy until their old home has been sold!
We’ve worked out some solutions that work for most people so read on to find out how we can help you when selling and buying a new home.
What do I need to consider?
The method you choose depends on your current equity situation, the type of loan you qualify for and what your needs are.
You should ask yourself the following questions:
- Will it be easy to sell my home quickly?
- How long will it take for me to find a new home?
- Can my family help me out financially, if need be?
- Do I have enough equity to consider a bridging loan?
- Do I have a high enough income to consider owning both at the same time without a bridging loan?
Which solution is the best for me?
Below is a summary of the most common methods adopted by people in various situations.
- Selling first: This is suitable if you have little to no equity or if your property may take some time to sell.
- Buying first: This is suitable if you have significant equity and a strong enough income to hold both properties.
- Buying first with a guarantor loan: This is suitable if you have little to no equity, a strong enough income to hold both properties and your parents are willing to put up their property as additional security for your loan.
- Simultaneous settlement: This is suitable if you can arrange both the purchase and the sale to settle on the same day. Often, you’ll need to have excellent negotiation skills or a great mortgage broker and solicitor to make this work.
- Bridging loan: This is suitable if you have significant equity but don’t have enough income to hold both properties for a long period of time.
Selling your old home first
This is where you sell your current home before you buy your new home.
The biggest disadvantage is that you may have to rent a place for a period of time before you’re able to find a new house.
The advantage of this method is that the funds from the sale of your home will be in your account so you won’t be taking the risk of committing to buy a new home, without having a deposit available.
If you don’t have much equity in your current home (you owe over 80% of the property value_, you won’t qualify for a bridging loan so selling first may be the best option to go with.
If you’re good at negotiating, you may be able to get the person buying your home to agree to rent your home back to you until you buy a new property. This will avoid the need to move home twice!
Buying your new home first
This is where you buy the new home first and sell your existing home at a later date.
The lender will take security over both properties and you would be make repayments on the total debt amount.
When you sell your old home, the debt would be reduced and your repayments would drop.
This is suitable for people with an excellent income and those who have significant equity in their current property (they owe less than 60% of the value of their property).
The major advantage of this method is that it allows you to buy right away and avoid renting whilst you find a place.
Unfortunately, many people who choose this method aren’t actually in the financial position to hold both properties at the same time!
So their bank declines their loan application or they are forced to sell their old home quickly, often below market value.
Buying first with a guarantor loan
This is where you buy your new home first with the help of your parents who provide a guarantee over their home or investment property.
Because of this, you’re not required to have significant equity in your home.
When you sell your old home, you can pay off part of your debt and, in most cases, remove the guarantee entirely.
This solution is an excellent choice for people with a strong income and have parents that are able to guarantee their home loan.
A simultaneous settlement is where the settlement for the sale of your old home and the purchase of your new home happens at the same time.
This is notoriously difficult to orchestrate!
However, when it works you don’t have to pay rent on a property whilst waiting to buy and you don’t have to pay a mortgage on two properties at the same time.
Sounds great but there’s a problem.
If one of the settlements are delayed, it can cause difficulties!
Both settlements are reliant on each other so if one of them has a minor problem, the entire move needs to be rescheduled for two to three days later.
This could end up costing you money in penalty interest and, if the problem causes a serious delay, you may lose your deposit!
How can I simultaneously settle?
Most people who do this sell their home with a long settlement of up to 6 months.
They include a clause that allows them to bring forward settlement as long as they give four weeks’ notice.
They then look for a property to buy and when a property is found, they can move the settlement on their old home forward so that both properties settle on the same day.
The only risk involved with this is if you don’t find a home to buy in time, you may need to move out of your old home and rent.
Alternatively, some people buy their new home with a long settlement of 6 months and a clause that allows them to bring forward settlement.
They can then sell their old home and bring forward the settlement of their new home to match the settlement date for their old home.
The risk of this option is that if you don’t sell your home in time, you may end up losing the deposit on the new home.
Therefore, we don’t recommend this option to most people.
What do I need to achieve this?
If you want to make a simultaneous settlement work, you must have excellent negotiation skills and be willing to sell your home a little below value, or buy a little above value.
This will provide the other person with an incentive to agree to the delayed settlement.
This option often works best when the sale is between friends or family members.
Using a bridging loan
A bridging loan is used when you buy a new home before you’ve sold your own home.
The bridging loan allows you to temporarily own both properties and, in most cases, the interest is capitalised (added to the loan) until you’ve sold your old property.
This method is only available to those that owe approximately 60% or less of the value of your home, as lenders require you to have significant equity before they’ll approve your bridging home loan.
Lenders don’t require you to be able to afford the debt when you own both properties (known as the “peak debt”).
This is because the interest is capitalised.
However, if there’s a debt that remains once you have sold your old home, then you must be able to afford that debt.
Is a bridging loan right for me?
In most cases, the people that apply for bridging loans are pensioners who are downsizing homes.,
There’s usually no debt left over when the old property is sold.
In these situations, there’s no need to prove income.
The main advantage of a bridging loan is that you can buy a property now, move into it and then sell your old home whenever you wish.
The disadvantages are that you’ll be charged a high amount of interest during the period in which you own both properties, you need a lot of equity to qualify for a bridging loan and there’s often a set time period in which you have to sell your home.
Get the right advice
Speaking to the right people will make the process smoother!
If you have a good real estate agent and solicitor, you’ll be getting the information you need to make informed decisions.
If you’re doing a simultaneous settlement, you’ll need a very experienced conveyancer and if you’re using a bridging loan, it’s important to speak to an expert mortgage broker.
Apply for a home loan
Do you need finance for your new home?
Please contact us on 1300 889 743 or fill in our free assessment form and one of our mortgage brokers will give you a call to discuss the most suitable home loan options for your situation.