Many people upgrading their home would prefer to buy first and sell second.
It can mean avoiding a rushed sale, moving twice, renting in between or feeling pressured to buy the next property before the right one comes along.
The challenge is that, for a period of time, the lender may need to be comfortable with both properties and a much higher overall debt position.
That is why buying before selling needs to be worked through carefully before making an offer.
Why Buy Before You Sell?
Selling first can be the simplest option from a lending perspective, but it is not always the most practical option for a family.
Buying first may allow more time to find the right property and avoid having to accept an offer on the current home simply because there is a deadline to meet.
It can also provide more time to move before preparing the existing property for sale.
The main question is whether the lending and cash flow can support the changeover period.
What Does the Lender Assess When You Own Both Properties?
For a period of time, the borrower may have:
- The existing home loan
- The new home loan
- Additional borrowing for the deposit and purchase costs
- Two sets of property-related expenses
- A higher overall debt position than will remain after the existing home is sold
The lender needs to be satisfied that the proposed structure works during this period.
How that is assessed will depend on the lender, the available equity, whether bridging finance is being used and how the expected sale of the existing property is treated.
How Does Bridging Finance Work?
Bridging finance is designed for situations where a new property is purchased before the existing property has been sold.
The lender looks at the total debt during the bridging period, often referred to as the peak debt, and then the amount expected to remain after the existing property is sold.
That final position is often referred to as the end debt.
For example, someone might purchase a new home for $2.2 million while still owing $600,000 on the current home.
For a short period, the total debt may be much higher than the amount that will ultimately remain.
Once the existing property is sold and the sale proceeds are applied to the lending, the debt can reduce significantly.
Both the temporary position and the expected end position need to be considered before proceeding.
Can Equity Be Used for the Deposit and Purchase Costs?
Often, yes.
Homeowners who have been in their property for some time may have built up substantial equity that can potentially help fund the next purchase.
That equity may be used towards the deposit and purchase costs, depending on the lender and the overall borrowing position.
However, having equity and being able to access it are not the same thing.
The lender still needs to be comfortable with the additional borrowing and the total debt position.
It is also important to understand how any equity release is structured and what will happen to that lending once the existing property is sold.
Your Expected Sale Price Matters
When buying before selling, the expected value of the existing property becomes an important part of the calculation.
It can be tempting to base the plan on the highest recent sale in the area, but relying on an optimistic sale price can leave very little room if the market does not deliver that result.
A more useful approach is to understand what the position looks like at a realistic sale price and what happens if the property takes longer to sell than expected.
That provides a better picture of whether the overall structure remains comfortable if things do not go perfectly.
Cash Flow During the Changeover Is Important
Even where the long-term position looks strong, the period between buying and selling can be expensive.
There may be higher loan repayments, moving costs, legal fees, agent fees, presentation costs and other expenses associated with completing two property transactions close together.
The amount of cash remaining after the purchase therefore matters.
A lending structure may work on paper but still place too much pressure on household cash flow during the transition.
This should be considered as part of the overall decision, not just after the new property has been purchased.
Do You Always Need Bridging Finance?
No.
Some borrowers have enough income and equity to qualify for the new purchase while continuing to carry the existing debt.
In that situation, a standard home loan structure may be possible without using a specific bridging product.
The existing property can then be sold later and the sale proceeds used to reduce the debt.
Whether this works depends on borrowing capacity, available equity, the existing loans and the lender’s policy.
For households with strong income and a substantial equity position, there may be more than one way to structure the purchase.
When Can Selling First Be the Better Option?
Buying first is not automatically the better strategy.
There are situations where the bridging position may be too tight, the temporary repayments may be uncomfortable or there may be too much uncertainty around the likely sale price of the existing home.
Selling first can also provide certainty around exactly how much money will be available for the next purchase.
The aim should not be to force a buy-first structure simply because it is more convenient. The important question is whether the overall position works comfortably and provides enough margin if circumstances change.
Work Through the Numbers Before You Find the Property
The best time to consider buying before selling is usually before the next property has been found.
That allows the current property value, existing loan, expected sale proceeds, available equity, likely purchase price and temporary debt position to be considered without the pressure of a contract or auction deadline.
The available options might include bridging finance, releasing equity, carrying both loans for a period or selling first.
Once those options have been worked through, it becomes much easier to understand what purchase range is realistic and how the move could be structured.
Have a Question About Buying Before You Sell?
Buying before selling can work in the right circumstances, but the structure depends on the existing property, available equity, borrowing capacity and expected sale proceeds.
Ask me a question if you would like to understand how the lending side may work in your situation.