Buy before selling, or sell first?
Are you upgrading or downsizing? Or maybe the grass really is greener on the other side of the road? There are plenty of reasons to sell up and buy a new home - or is it buy a new home and then sell up?
It’s a common conundrum. Unless you’re in the rare position of lining up two settlements simultaneously, you’ll have to make the call. Do you sell first and hope you find the right property to buy in time? Or buy the home of your dreams and cross your fingers you’ll get a buyer for your current property?
To help sort through the decision, we’ve put together a helpful pros and cons list.
Selling first - is it really safer?
You’ll know how much you have to spend on a new property - less danger of overextending
No time pressure to sell, meaning you can hold out for the price you want
In a falling market you might be able to get a higher price now and then buy for less down the track
You’ll need to find somewhere to live between settlement and when you get the keys to your new place
In a rising market, you run the risk that property prices will have gone up since you sold
You might feel pressured to buy somewhere you don’t love
If you rent between selling and buying, you’ll need to move twice - incurring additional costs
You can take your time and find your perfect home without feeling pressured
Buying first gives you a clear goal and can be very motivating
In a rising market, you can lock in your purchase now and then sell when prices rise
Unless you can sell at the same time, you’ll have a period where you’re paying two mortgages
You might take a lower price than you wanted so you can offload your property quickly
A rushed sales campaign might fail to market your property effectively
Tim and Deborah intended to buy a bigger home once they started a family. One weekend they drove past their dream house. They decided to ‘just have a look’ and before they knew it, they were signing the contract.
Now they needed to sell their apartment - fast! They worked hard, but were already three weeks out from settlement on the new property when their first open inspection was held.
Tim and Deborah knew that they wouldn’t be able to sell in time. They went to talk to a mortgage broker about their options. He helped them arrange a relocation loan to cover the period between buying and selling.
Their new house cost $700,000, and they still owed $200,000 on the apartment. During the period when they owned both, the holding cost was an extra $500 per week. Over the seven weeks it took them to sell the apartment, they paid $3,500: just 0.5% extra on the total purchase price.
“Most people we see buy a house before selling. There are several options out there to help cover the period during which they own both. It might be a little extra money, but it’s usually worth it to get the house you really want.”
- Mark Edlund, Clarity Home Loans.
What is a relocation loan and how do they work?
A relocation loan is a loan product designed to cover the period during which you’re paying for both mortgages. These have replaced bridging loans, with significant changes to make them more palatable for borrowers.
Here’s a quick explanation of the concepts involved in a relocation loan. For simplicity's sake, we've excluded fees and charges from our example.
This is the amount that you’ll owe at the ‘peak’ of the process—that is, while you own both properties. For example, if you are buying a property for $700,000 and selling a property on which you owe $200,000, the peak debt will be $900,000.
The ongoing balance is the amount you will pay once the first property is sold. Let’s say that in the above example, you sell your first home for $400,000. The peak debt is reduced by that amount, leaving you with an ongoing balance of $500,000 (plus additional fees and charges including stamp duty).
The lenders assess serviceability based on the ongoing balance. This is because the holding cost (see below) is not due until you have sold the first property, and is rolled into the overall loan structure.
The holding cost is the amount that you have to pay on top of the ongoing balance. It’s calculated weekly for the period during which you own both properties, but repayments aren't due until you sell your first property.
For example, let's say that repayments on the peak debt of $900,000 are $1300 per week, but repayments on the ongoing balance of $500,000 are $800 per week. The holding cost is the difference: $500 per week.
While that might sound like a lot, remember it's only for a few weeks. If your existing property takes six weeks to settle, your holding cost is just $3000. Compared to the purchase price, that's a drop in the ocean—worth it to get your dream home.
Not all lenders offer a relocation loan product. In this case, talk to your broker about an investment loan. Mark Edlund of Clarity Home Loans explains.
“What we do is to approach the loan as if you’re keeping both properties. We use some of the equity from your existing property, as well as the potential rental income, to apply for an additional mortgage on the new property. If you sell the first property, the first mortgage will get paid off and you can shift the funds over to the second property.” To cover the additional interest due before the second property sells, Mark and his team build a buffer into the loan amount.
In fact, you might start out by intending to sell and then discover that you want to build an investment portfolio instead. “We’ve had a lot of clients come in to apply for a relocation loan and then end up keeping both properties. It’s a great way to build wealth for the future.”
What you'll need
Whether you're applying for a relocation loan or a second mortgage, there are some conditions that lenders will need you to meet. These include a low LVR relative to first home buyers, and may also include a ‘fire sale buffer’ to cover themselves if your first property sells for less than expected.
As always, conditions vary between lenders, so get advice from an expert broker.
If you're thinking of buying a second property or need to sell your first, Independent can help. Give us a call to arrange a free appraisal or be the first to know when a new property hits the market.
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