It is a dilemma faced by potential homebuyers every weekend and one that almost everyone has an opinion about. Whether or not to buy before you sell? And while every person’s situation is different, there are a few things worth taking into account if you’re ever in this position.
You’ve found the perfect home for your next chapter in life. The only problem is, you need to make an offer before you’ve sold your existing home. Conventional wisdom (and many advisors) will tell you to sell you current property to be sure what your budget is and to stay away from bridging loans.
Sometimes it’s healthy to challenge conventional wisdom as there may be good reasons to seize the opportunity presented by a property before selling yours.
In a recent domain.com.au article, Andrew Heaven, certified financial planner and director of Wealth Partners suggested that there are at least two situations where buying before selling is a good idea.
- When a buyer is looking to move from a tightly held and hotly contested location to an area where the market is somewhat slower. In this situation the prospect of selling the current home is high and carries lower risk.
- When the current home is highly desirable and likely to hold plenty of appeal to potential buyers.
These scenarios are generally ‘safer bets’ and if a bridging loan is required, lenders are likely to be more accommodating in their terms.
But Heaven points out that risk emerges when “supply of property on the market is outstripping demand, a market is falling, clearance rates are falling or ‘time-on-market’ is rising.”
“The other indicator, is the average discount on list-price versus sale price,” he adds.
RT Edgar Albert Park Director Gerald Betts advises that there are more practical reasons for taking the leap and buying before you sell. “Knowing you will definitely have somewhere to move to means you will only need to move once. That provides real peace of mind for many vendors” he says.
“Avoiding the need to find a suitable home to rent in the short term, which can be expensive and time consuming, is reason enough but also reducing the cost and stress of multiple moves, double-handling connections, redirections and the packing and unpacking processes are real considerations.”
The bridging loan dilemma
With the recent scrutiny placed on the entire financial services industry in Australia, bridging loans may not be the ogres that they once seemed to be. In fact, even with the shadow of the Royal Commission hanging over them, a number of banks appear to have realised the competitive advantage to be gained by making bridging loans more attractive. Interest rates may be more comparable to standard loans, fees and charges are often the same and repayments may be frozen until the property is sold (although it can be wise to make repayments when you can).
Most lenders also appreciate that a bridging loan can reduce the pressure on the mortgage holder to sell, which means that the sale of property isn’t rushed and is therefore given the best opportunity to maximise the sale price which will reduce the default risk.
The fixed-rate period for bridging loans is usually limited to around six months, after which a higher interest rate is applied.
There are still likely to be downsides to this type of loan. These include:
- monthly compounded interest rates,
- higher rates if the property doesn’t sell in time and
- the possibility of having to change lenders (with transfer or termination fees) if your current lender doesn’t provide a suitable bridging option.
And because bridging loans are not covered by Lenders Mortgage Insurance, very few lenders will offer a one without a deposit of at least 20%. This means that you will either need to have enough savings for the deposit or you’ll need to arrange a “deposit bond” to be paid to the vendor via an insurance company.
What is a deposit bond? Also known as a deposit guarantee, it is basically an insurance policy that assures the vendor that the deposit will be paid. The purchaser buys a deposit bond from an insurer who agrees to pay the full deposit (usually 10%) to the vendor should the purchaser default. If the buyer is able to pay the vendor at settlement, the bond is cancelled. If not, the vendor makes a claim to the insurer. In some circumstances, this can be a more economical option for the purchaser than a bridging loan.
Gerald believes that “before taking the option of buying before selling, it’s important you have an accurate, realistic and up-to-date valuation of your own home and that you are fully aware of the local market conditions”.
Maximising the equity you have in your current property is important as well because bridging loans will take into account the amount of equity you have in your home to determine the size of the bridging loan.
Often overlooked, one downside to buying before you sell can be under-valuing your current home. With in-depth research into the market this can be avoided, but many agents have stories to tell about clients who sold their homes for substantially more than expected, and realised they could have afforded a better home than the one they had already purchased. It is not the worst problem to encounter, but it can still lead to a degree of buyer’s remorse or uncertainty.
As always, speak to a professional financial advisor about the impact of manage a bridging loan on top of your other expenses to ensure you’re comfortable living with the extra cost – even if only for the short term.
And a final word of advice from Andrew Heaven: “Just make sure your property is always ready for market … and have a Plan B in place, in case there’s a hiccup with your sale.”
All material in this article, and the links provided, are for general information only and should not be taken as constituting professional advice from RT Edgar Pty Ltd or any of its associates, employees or contractors.
RT Edgar Pty Ltd is not a financial advisor. Before making any changes to your financial arrangements, you should consider seeking independent legal, financial, taxation or other advice to determine the best course of action to suit your unique circumstances.