It’s one of the most common and persistent real estate questions – should you sell your current home before you buy? Or buy before you sell?
If you’re somebody who’ll get cold sweats at night because you’ve doubled your debt with a bridging loan to buy a new home before selling the current one, then don’t do it. Peace of mind has a real value.
The other side of the equation – selling before you buy – also carries risk, albeit smaller. What might you do in a tight rental market if you haven’t found a new property when contracts exchange on your current one?
As your real estate agent, we’ve seen this scenario a thousand times. Our view is that selling first is the safest strategy. It sharpens your bargaining power when selling your existing home and allows you to negotiate your subsequent purchase with more confidence.
You are in a stronger position to achieve the best price for your existing home when you’re not under financial pressure from bridging loan payments. With the money in the bank, you can take more time to find and bargain over the price of your next purchase.
By selling first, you could require temporary accommodation. But don’t let that bother you too much. It’s common to negotiate an extended exchange period with the buyer of your current home to gain additional time to find a new house.
Alternatively, you can rent but that can be time-consuming and expensive. It also means you’ll need to do two “moves” rather than one which can be disruptive to your family.
You don’t however want to rent and be on the property sidelines too long, though. In a strong market, you may find your cash position fails to keep pace with prices and you’ll have to lower your expectations for your next purchase.
The only time you should consider buying first is if the market is very strong and you can expect immediate interest from buyers when you list your home to sell.
Should you get caught out however, the financial pain can be acute. Most likely, you’ll need a bridging loan to pay for your new home. These carry a higher interest rate and you’ll have to pay the equivalent of two mortgages while your house remains on the market.
There’s also no guarantee a bank will provide such a loan. If you’re refused finance, you’ll have to find a new lender with all the exit costs that entails, or you lose your dream home and wave goodbye to your deposit.
In the event a bridging loan is approved, a bank will insist on seeing cash or assets that demonstrate your capacity to meet your obligations for at least six months, together with the burden of the existing mortgage.
If you meet the criteria, a lender will normally cover the full cost of your new property but the loan won’t last forever. It will expire or require renewal after 180 days.
When a bridging loan runs for an extended period, your negotiation position becomes desperate as you try to off-load your property to stop carrying the weight of two mortgages.
In summary
- It is lower risk to sell first, buy second.
- By selling first, you remain in a strong position to maximise the value of your existing home, rather than offload it to stop paying both a mortgage and a bridging loan.
- Bridging loans can be used to finance a new home while the old remains for sale. They are expensive and by no means an ideal answer.
- In a strong market, the risk of being caught-out is less because homes tend to sell quickly.
- In a weak market, you’re asking for trouble. It might take months before your home is sold.
- You can seek additional time to sell your home by negotiating a longer settlement period
- Or, seek to rent the new house while yours remains on the market, and then finally make a purchase. This is a rare situation but worth exploring if you find yourself in a jam.