Things to consider before you buy your next home
Sell First? Buy First? Get a Bridging Loan?
Whether you are upgrading or downsizing, you’ll need to decide if you will buy the new home first, or sell your existing home.
This can often be quite tricky as most people don’t want to sell until they have found a new house and often many people can’t buy until their old home has been sold!
We’ve worked out some solutions that work for most people.
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 & 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 will need to have excellent negotiation skills to make this work.
- Bridging loan: This is suitable if you have significant equity, but do not 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 the period of time before you find a new house to purchase.
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, e.g. you owe over 80% of the property value, then you will not qualify for a bridging loan, so this may be the best option to go with.
If you are 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 then sell your existing home at a later date. The lender would take security over both properties and you would be making 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, as well as those who have significant equity in their current property, e.g. 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! You can also avoid having to rent whilst you find a place.
Unfortunately, many people who choose this method do not actually have the financial resources 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 the 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, as additional security for your home loan. Because of this, you are 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 who have parents that are willing and able to guarantee their home loan.
This 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, where it is successful, 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 doesn’t it?
The only problem is that if one of the settlements are delayed, it can cause difficulties! Because both settlements are reliant on each other, if one of them has a minor problem then 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 six 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, then you may need to move out of your old home and rent.
Alternatively, some people buy their new home with a long settlement of six 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 do not 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 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 have 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 have 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 will approve your bridging home loan.
Lenders do not require you to be able to service the debt when you own both properties (known as the “peak debt”). This is because the interest is capitalised. However, if there is a debt that remains once you have sold your old home, then you must be able to service that debt.
Who applies for bridging loans?
In most cases, the people that apply for bridging loans are pensioners who are downsizing homes. There is usually no debt left over when the old property is sold. In these situations there is 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 need a lot of equity to qualify for a bridging loan and there is often a set time period in which you have to sell your home.
Get the right advice
Speaking to one of our professional Mortgage brokers will make the process smoother! If you are using a simultaneous settlement then you will need a very experienced conveyancer.