Do you want to buy a new home? Maybe you want an upgrade on your current home, or circumstances mean you need to downsize.
Whatever the case may be, you need to figure out how to handle the transactions. Do you buy first and sell your old home once you’ve secured a new one? Or, do you sell first and buy later? When do you get a home loan?
It’s a catch-22. You may not have the money to buy a new home before selling your old one. But you don’t want to sell until you’re sure you have another home lined up.
There are some potential solutions to these problems. At uno home loans, we can help you make the right decision.
Things to Consider
Before you do anything, you should consider the following questions:
• How easily can you sell your current home?
• Do you know anybody who can help you financially, if needed?
• How easy is it to find a new home that suits your needs?
• Do you have enough equity in your home to get a bridging home loan?
• Can you afford two properties in the short-term?
Your answers to those questions will determine which solution works best for you. Let’s take a look at some options.
Selling Your Current Home First
Selling your home before buying a new one should give you the money needed to put down a deposit. You don’t want to commit to a purchase without the money to back it up, and you may find it easier to secure a home loan.
But you leave yourself with nowhere to go once you complete the sale. You may have to move back in with your family, or rent a home during the bridging period.
You also need to consider how much equity you have in the home you’re selling. If you’ve paid less than 20% of the home’s value back through your loan, you may not qualify for a bridging loan. This makes selling first a bad option.
You could work with your buyer to come up with a solution. Some will allow you to rent your old home back from them for a couple of months while you search for a new home. This saves you from moving twice, but it depends on the attitude of your buyer.
Purchasing a New Home First
Buying your new home before selling your old one means you have somewhere to go straight away. You won’t have to worry about renting in between transactions, or relying on the grace of others to help you out.
But you need to have financial stability to attempt this. You essentially pay two home loans during the transition period when you go down this route. Your repayments will have to cover both properties, but you will find that your payments decrease once you sell your old home.
As such, this option works best if you have enough money to fund the purchase without selling. Also, you can often buy first if you have repaid at least 40% of the old home’s loan.
Trying to buy first when you aren’t financially stable may make a lender decline the loan on the new property. This forces a quick sale, which can result in you getting less than the market value for the home.
Purchasing First with a Guarantor Loan
This is where people who can help you financially come into play. Your parents could use their home as a guarantee, allowing you to secure a guarantor home loan. In many cases, you can pay off this guarantee upon the sale of your old home.
This solution allows you to buy first without having built a lot of equity in your current home. But you will still need a stable income and parents who are willing to take out the guarantee.
A Bridging Loan
Remember when we spoke about paying loans on two properties if you buy first? That’s where bridging loans usually can help
A bridging loan allows you to own both properties temporarily, without forcing you to commit to the full loan on your new property until you’ve completed your sale. The interest for the properties gets added to the loan until you complete the sale of your current home. You can also take your time with the selling process, assuming you can afford the extra interest on the bridging loan.
You must have built a lot of equity in your home to take this option. Most lenders will insist that you have repaid at least 40% of the existing home loan before you can get a bridging loan.
Beyond that, the lender won’t expect you to be able to afford the debt on both properties during this bridging period. But you will need to pay back any debt that remains once you’ve completed the two transactions.
A bridging loan works best if you’re looking to downsize into a less expensive home. This usually means that no debt remains after the transaction, so you don’t need to provide a lender with proof of income.
A Simultaneous Settlement
In an ideal world, you can arrange to buy your new home on the same date you sell your old one. Unfortunately, things rarely work out that way. Just one issue with either transaction can cause delays.
That means each settlement relies on the other for things to work out. Delays on either end could mean you end up paying penalty fees. Worst case scenario, you could lose your entire deposit on the new home.
But you get two key advantages if everything works out in a simultaneous settlement. You don’t have to find somewhere to live between the two transactions, and you won’t pay a home loan on two properties simultaneously.
How Can I Do a Simultaneous Settlement?
We want to take a moment to look at simultaneous settlements in more detail, as they’re the most complex option here.
Firstly, you need to offer a long sale settlement before going down this route. Many choose a settlement period of six months, with the option of shortening the period with four weeks’ notice.
This clause is the key. You will search for another property during this period, after which you can move the settlement forward depending on the settlement date of the new home.
You can do it the other way too. Your purchased home could have a long settlement period, which you adjust depending on when you sell your current home. This option presents more risks, including the possible loss of your deposit. If you can’t sell your home within the buying settlement period, you may lose your deposit.
That makes this the most complex option of the lot. You also need to have the following to make a simultaneous settlement work:
• Top-notch negotiation skills.
• The willingness to sell below value and buy above value.
• Good relationships with all involved in the process.
Experienced mortgage brokers can help you with the details, as can good real estate agents.
So which option works best for you? Here’s our summary:
• Selling first works best if you believe the property will take a long time to sell, or you haven’t built much equity.
• Buying first is ideal if you earn enough to cover both properties and have built at least 40% equity.
• A guarantor loan will help you if your parents are willing to place a guarantee against their home for you. You won’t need much equity if you choose this option.
• Bridging loans work best if you have built at least 40% equity, but don’t have the money to pay for two properties at the same time.
• A simultaneous settlement is potentially the best, but most complex solution. You need to feel confident in both transactions, as well as maintain great relationships with all involved.
What to do next
Speak to a mortgage broker to find out about home loan policies. You will need to secure a loan on the new home at some point, so it’s a good idea to begin early. You can do three things to start the process:
• Use the uno home loan calculator to find out how much you can borrow.
• Check our current rates.
• Open a live chat with an uno mortgage advisor.
This information is general in nature, and you should always seek professional advice when making financial decisions.