At some point many people find themselves in the situation where although they have already purchased the home they live in, they want to buy another property – to upgrade, downsize, move across town, take a new job interstate – the reasons are many and varied.
At such a point they find themselves asking: Is it better to sell my current home before I buy the next one? On the face of it, this seems like a sensible decision. BUT, life isn’t always neat and tidy and in most instances, there are other factors and timetables to consider too.
But here is an outline of some of the eventualities of this kind of scenario.
Selling first: This is a good solution if you only have a small amount of equity or if you know your property might take some time to sell. The upside is that once you’ve sold you’ll know exactly what you can spend and you can finalise the ‘old’ mortgage before taking out a new one. The downside is that you might have to rent for a while before you find another property.
Buying first: You need to have significant equity and a strong, steady enough income to hold both properties so it’s not wise to attempt this if you don’t because lenders may deny your loan application if the finances aren’t sturdy enough.
It’s important to realise that if you buy a new property before you sell your existing one, the lender takes security over both properties and you need to make repayments on the total debt amount, which can be a significant undertaking. When you sell your old home, then the debt gets reduced.
Guarantor loan: Sometimes, in these circumstances, other security is also required such as a guarantor loan (when a third party puts up collateral on your behalf, for example your parents use their own property as ‘guarantor’ on the loan).
Bridging finance is another alternative. Bridging finance is a special loan that will enable you to secure the new property before the old one sells. Bridging finance is expensive though, and often has a set time period, which can put you under pressure to sell your old home and perhaps even take an offer that’s less than you want, just to meet the deadline.
Simultaneous settlement: This occurs when the settlement for the sale of your old home and the purchase of your new home happens at the same time. It’s not every day that this kind of timing matches up! It can be done, but it can also be stressful because both settlements are dependent on each other and if for any reason one is delayed then both need to be rescheduled.
Just remember that every circumstance is different and there will be a solution to whatever dilemma you face with your loan and how to finance your next property, so don’t go it alone, ask your broker to take you through the options that are best for you. Your broker will give you all the information you need to make an informed choice.