It’s the ultimate dilemma for any home owner planning to move on to a new property – do I sell or buy first? You don’t want to sell unless you have somewhere else to live, but you don’t want to buy unless you have the money from the original home. Whichever way you go, there will be some stress involved, so it’s important to look at the pros and cons of each option to decide which is the most suitable and practical for your circumstances.
Questions to consider
Your decision should be based on your current equity situation and how fast you can sell your current home. In a “hot” market, a “hot” property is sure to sell fast – but don’t assume that your property will attract an immediate buyer. Do your research so you have a realistic idea of the potential selling time. The other factor to consider is how long it will take you to find your next home. You don’t want to be left homeless and in limbo while you search for the perfect property.
Of course you can only estimate how long it will take to sell your home and find a new place to live. Whatever the market is like, the process can be much quicker – or slower – than you anticipate. So you also need to consider what kind of back-up support you have in place. For example, could your family give you a place to stay while you are between houses? Or could they lend you enough money to make an offer on the perfect house before your current home is sold?
Your financial status
Generally speaking, selling first is a suitable option if you have little to no equity, or if the property will take some time to sell, either because the market is slow or because the property is unusual and will only attract a niche market. This way, you are not caught in the situation of having two mortgages, and you can purchase your next home with an established budget based on the sale of your last home.
If you have significant equity in the current home combined with a healthy income, you can afford to balance your payments if you buy first.
If you are very lucky and well-organized, you can achieve the ideal – a simultaneous settlement. This is when the sale of your previous home and the purchase of your new home are processed simultaneously. So the money from your sale is instantly transferred into the purchase of your next home.
One way to achieve this is by selling your home with a long settlement period of up to six months. This gives you time to look for a new property, knowing that the payment from your previous home is available for the purchase. You can include a clause allowing for the settlement to be brought forward in the event you find a home within that time frame.
You can also purchase a new home with a long settlement period, giving you extra time to sell your current home. However, this is more risky because if you fail to sell your home within the specified period, you could potentially lose your deposit on the new house.
Problems can develop on the day of simultaneous settlement if one of the settlements is delayed for some unforeseen reason, which could result in the entire move being rescheduled for a few days later. This in turn can trigger other challenges such as additional expenses in penalty interest. If the delay drags out, you may risk losing your deposit.
Buying first with a guarantor loan
If you have plenty of equity in your current home, but you are not sure how long it will take to sell, you may consider the option of a guarantor loan. This will involve a friend or family member (usually your parents) putting up their home or investment property as additional security for your loan. Once you sell your home, you can pay off your debt to the guarantor, so they are no longer providing security for the loan.
Buying first with a bridging loan
If you owe approximately 60% or less of the value of your current home, you may have sufficient equity to apply for a bridging loan. A bridging loan covers the cost of purchasing a new home and maintaining the two properties until you have sold your current home. You need to prove that you have sufficient equity to cover the loan once your property is sold.
This is generally a good option for a home owner who is downsizing, such as a pensioner, as the new home will be of considerably less value than the current home. As a bridging loan incurs a significant amount of interest, it is not a good option for anyone buying a more valuable property than the one they are selling, as the interest could become unmanageable.