One of the most common questions asked in real estate is whether it’s better to sell first and then buy, or take the opposite approach.
Unfortunately, there’s no right or wrong answer as it depends on your financial situation, risk tolerance and the prevailing mood of the market.
While selling your home first reduces financial risk, it can put you under significant time pressure.
If the settlement period is six weeks, you have a limited window of opportunity to find your next home before you need to contemplate whether it’s a smart play to rent while you look for a new property.
The challenge here is logistical as finding a rental property in the current low-vacancy environment is easier said than done.
Also, the time you spend outside of the market – that is, renting – can be expensive if values start to rise sharply. And that’s certainly a possibility with consumer confidence rising and interest rates falling.
The alternative – buying first – has a significant financial risk element.
If your home doesn’t sell in the expected timeframe, you could be stuck with two loans – one for your current property and the other for your next home.
In this situation, you need to turn to a bridging loan to get you through this usually short but sticky period.
Here’s how they work:
Loan purpose – A bridging loan is used when the timing of your sale and your purchase do not match up. If there is a shortfall of a few weeks between the two deals, a bridging loan will allow you to manage this issue.
Loan limit – The amount a lender will give you for a bridging loan will depend on the percentage of equity you have in your existing loan. It’s always a good idea to talk to your lender about the possibility of a bridging loan before you make a purchase.
Time limit – Most bridging loans last three to four months (90-120 days). This should give you sufficient time to find a buyer for your current property. The average number of days it takes to sell a property is around 30-35, depending on your area.
Qualifying – Lenders will ask if you have a committed buyer for your home. This gives them peace of mind. If a deposit is already taken, most bridging loan applications are a formality. If there’s no buyer in sight, this becomes a little more difficult. Lenders will need to assess your capacity to repay two loans.
Interest rate – Bridging loans come with a slightly higher interest rate, so include this in your calculations.
Watch-out – Most lenders will want an agent to sell your home, as this gives them additional confidence that it is being marketed properly. Owners who are selling their property privately face additional hurdles as a rule – which is another reason why it’s smart to use real estate agents.
*NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial adviser or accountant for advice specific to your personal circumstances.