Coordinating buying a new home and selling your current one can be quite a juggling act. For things to go smoothly you generally need to have a strategy and a bit of luck!
People generally have three main goals when moving house:
- to get as high a price as possible for their current property (if they own one)
- to buy a new home as cheaply as possible
- to make the process as painless as possible
The first key to selling for a profit is improving your home. The other key to making the big jump successfully is to have done as much damage to your current mortgage as your pay packet (or packets) allow, so that the equity in your home can be converted into cash.
In other words, harness all the mortgage-busting tips Your Mortgage brings you each issue to pay off your loan faster. Make extra one-off payments. Pay a little more each time. Pay fortnightly not monthly. In short, make every cent count.
To ensure the move goes as smoothly as possible, there is generally a need for the buying and selling process to be as close together as possible.
Ideally, from a logistical perspective, settlement on the new property should occur a few days before settlement on the old, minimising the hassles involved in carting all your possessions from one home to another. However, as we shall discuss below, this may cause problems with the financing.
“When and whether to sell first then buy or vice versa is the eternal question,” admits John Smith, CEO at Inspired Finance Group Pty Ltd, “and this can depend on whether it is a buyer’s market or a seller’s market, whether you can afford a bridging loan, or have enough equity within your properties to capitalise on interest,” he says.
“In a buyer’s market, I would always suggest you sell first. The last thing you want is to be paying interest costs on two loans, or seeing equity in your properties eaten up, because you can’t sell your own home. You may be able to cut down costs with short-term rentals, but that may cause problems in regards to open house inspections. Of course, you could rent out the house you just bought.”
In a seller’s market Smith suggests buying first might be the best option, as you would assume that your property would be sold quite quickly. Again, he warns that it is important not to mix business with any personal feelings about your own property and remain objective – to ensure it is the type of property that would be sought by buyers.
“Overall, I would always suggest you sell first, keeping in mind that you can extend the settlement date to allow time to find a property. Also – remember to keep other options open, like family or friends that may help in a pinch,” he says.
When you are selling your existing home and buying your new home, you’ll need to watch movements in the market to ensure you match the timing of your sale with the purchase of your new home.
Lisa Montgomery, who is head of marketing and consumer advocacy at Resi, warns against selling your home before you have found your new house. “One of the hurdles you have to get over when selling before you buy (and renting) means that you’re doing a double move – and also you’re getting out of the market and it can be hard to get back in. So you need to have your finger on the pulse so you don’t miss out on the same market,” explains Montgomery.
The logical order is to sell first and buy second. In this way you know exactly how much money you have to spend. Clearly, you can be in serious dollar trouble if you overestimate the worth of your current home and purchase from an optimistic position. But also, think how you might kick yourself if you buy too conservatively. Sure, your mortgage will get a giant leg-up, but think about what you could have bought instead.
Selling your existing property before you buy a new one is the least risky course of action. It ensures your budget is a known quantity and means you’re less likely to get caught short by over-extending yourself on your new home. However, by selling first you may be forced to rent while you look for a suitable new home. This can mean two moves, two lots of utility connection costs and two packing and unpacking efforts.
Alternatively you could live out of a suitcase in a hotel (or with family) and put your furniture in storage. This can be costly (emotionally as well as financially) if it takes a substantial period of time to find the perfect new home. One way around this is to request a lengthy settlement period to allow you ample time to find a new property.
Another risk you face if there is a reasonable gap between sale and purchase is that rising property prices will mean you get less for your money as time goes by. If you invest the equity (the money you have paid off in loan repayments) you receive from your sale you can earn a return for the interim period. However, if you have a small percentage of the equity in your property this is likely to work to your disadvantage.
For example, if you have paid off approximately 20% of the purchase price of your potential property, say $40,000, you could earn a return on this amount while waiting to purchase your new home. If property prices are rising, the total value of an average property (say $200,000) is increasing. If you were earning 5% on your money in a cash management account and the situation dragged on for a year, you would earn $2,000 on your $40,000.
If property prices were increasing by 10%, the price tag would increase from $200,000 to $220,000. So you have earned $2,000, but the price of the average property has risen by $20,000, so you will be getting less for your money in the long run.
For those who are financially capable, buying first does have its pluses. It can dispense with the hassle of you possibly having to rent in the interim period. This is often a major concern for the elderly, those with young families and those with lots of furniture requiring storage.
Many buyers also find their dream home prior to selling, or even prior to contemplating selling their home. Purchasing before you sell may be the only way to ensure you don’t miss out on that special property.
However, there are several disadvantages to buying before you sell:
1. If you have bridging finance, you are effectively committed to paying off a loan over two properties until such time that your existing home sells, which can prove costly.
2. There is often pressure to sell the existing property quickly when a new home has already been purchased. This may result in a lower than anticipated price being accepted and leaves the seller vulnerable to unexpected fluctuations in the property market.
3. In a slow market it may take more time than you had estimated to sell your first house.
Rent or sell?
If you have the option, buying a second home purely as an investment to rent out or to enable you to rent out your first home
and move into your second could be an alternative worth looking at. However, it depends on whether the numbers stack up.
The decision to keep the existing property should be made in conjunction with an accountant to ensure you have the right tax advice. Given the historical growth in this sector, if you can keep an existing property, it can be the start of a wealth portfolio.
Scenario: Young couple/family upsizing because of growing family
A young couple understandably looks to increase the size of their home based on the space they require each day. While this can be a fantastic decision and demonstrates that they are planning for the future, they need to ensure that any new purchase will not overextend their existing budget.
If the young couple has the ability to service the new property whilst maintaining the old property as an investment, they should get the right tax advice to take them down that path. That said, if they believe that it would stretch them beyond comfortable means, then their best option is to watch the real estate market, sell their existing place on a higher peak (with a longer settlement perhaps) and then purchase their new house as the market falls a little.
Scenario: Older couple/empty nesters downsizing because their kids have moved out
If an older couple is able to afford to purchase a new house while maintaining an existing property, it is something they should definitely consider. The benefit to an older couple is that they may be looking to retire in the next few years, and the income they can gain from renting the property out may make it a positively geared investment, or cash-flow positive for them.
That said, they still need to ensure that they can afford the repayments on their new mortgage, if they have had to borrow the funds to purchase the new property.
Scenario: Those who have built up substantial equity in their homes, have had a change in income, or looking for a new lifestyle and want to buy another property and move to a better location
Keeping the existing property will be great if they are looking for a positively geared property, but not if you’re trying to achieve tax savings. Depending on your circumstances and what the market is doing, you may be better off converting your old home into rental property as the cost of selling and buying new property is prohibitively high.
At the same time, if your old property is located in a high growth area, then holding on for a few more years may yield handsome capital gains.
Scenario: Those who are struggling with current mortgage repayments and need to downsize to be able to cope with the mortgage
You should put in place a plan of action before making any substantial decisions. Seeking financial advice is a good place to start, as is letting the existing lender know that you are having difficulty making due repayments. This will allow the lender to provide some grace for the borrower as they have shown responsibility by notifying the lender in the first place.
You should sit down with your financial advisor and look at the options of extending the term on your existing loan in the interim period, vacating the property and renting instead while putting a tenant into your property.
You should also look to consolidate any other debts that may be hindering your ability to repay your mortgage. If once you’ve looked at these options, you’ve decided that you have no choice but to sell, you should try to sell in a stable market to achieve the best sale price.
If you choose the ‘buy then sell’ road, bridging finance can be used to calm the financial waters. Bridging finance is a loan facility which allows you to fund the purchase of your new home while your old home, for whatever reason, is unsold. Effectively, it allows you to ‘own’ two homes at once. Loans touted as ‘bridging loans’ have various guises and it’s important to understand how these loans operate, so you can determine whether they will be suitable for your particular financial situation.
Traditionally, loans known as bridging loans were similar to personal loans. Offered at rates substantially higher than regular home loans, they were short-term products used to cover the deposit on your new home and could be secured or unsecured. The bridging loans available today have taken on a rather different set of features. They are designed to cover the full financing of your new property until such time as you sell your existing home and extinguish all or most of the debt. They are secured by both your existing and new properties and are offered at rates comparable with variable home loan rates.
Some are intended to be short-term loans, while others are long-term. If you require bridging finance, ideally your current lender will oblige. If, however, you go through a new lender, they will take on your existing loan, which means paying out your existing lender and extinguishing your debt to them. If this happens to be a fixed loan or ‘honeymoon’ loan with a low introductory interest rate, switching lenders can potentially cost you a small fortune in exit fees.
And now for the catch…
The obvious danger with bridging finance is that your existing property may take longer than expected to sell and you will be forced into effectively paying mortgage repayments on two loans.
The home loan landscape is littered with stories of bridging finance disasters – mostly revolving around extended periods of repayment due to unforeseen delays in settlement or the inability to sell the first home. Not only is this expensive, you may find yourself selling for less than you hoped for in order to extinguish the bridging finance, leaving you with a greater end debt and less equity than anticipated. Had you not been under pressure to sell, you may have been able to hold out for a better price. So be wary.
In most cases, bridging finance will not be the glorious financial ‘knight in shining armour’ people expect. However, if you choose to buy your new home before selling your old property, then bridging finance may be one of the only safe ways to bridge the financial gap between purchase and sale.
These are an excellent alternative to having small periods of bridging finance. They are used as a simple and effective way of making sure that you can cover the deposit on a new home when you don’t have immediate access to the necessary cash. But they are still a mystery to many borrowers.
A deposit bond is a guarantee by the company providing the bond that the buyer will pay the vendors the deposit on settlement of the property. The value of the bond is equal to the required deposit. For example, if the value of the property being purchased is $200,000 and a standard 10% deposit is required, a $20,000 deposit bond would be used.
The issuers of the bond guarantee that they will pay the vendor the deposit amount if the purchaser defaults and does not purchase the property. The provider of the bond will then pursue the defaulting buyer for this amount. This means that if you don’t go through with the purchase you will still lose your deposit just as if you had paid cash.
When settlement on the property occurs, the deposit bond is considered executed and the buyer must pay the vendor all monies owing, including the deposit.
Not all vendors will accept a deposit bond in place of a cash deposit so it is important to check before you go to an auction or have one drawn up for a private sale. However, as the provider of the bond guarantees to pay the amount, they are widely accepted.
Deposit bonds are of particular use at auctions where you are required to pay a deposit on the spot. While the bond amount is fixed, the vendor and property details do not necessarily have to be. You can attend any number of auctions and simply complete the vendor and property details when you are the successful bidder.
In general, deposit bonds cost around 1% of the deposit amount required. It is possible to arrange deposit bonds within 24 hours and it can be done by fax or mail. Alternatively, you can purchase deposit bonds through most lenders or real estate agents at no additional charge.
Mortgage: should you take it with you or leave it behind?
1. Take it with you
If you like the loan you already have, one option is to take it with you. Portability is the loan feature that allows you to substitute a new property as security for an existing loan. The loan essentially remains the same, but the underlying security becomes your new home, not your old one.
This can be a very simple and cost-effective solution, but not all loans are portable, and sometimes the portability fee (anywhere from $300 upwards) can be just as costly as completely refinancing your loan.
Then there’s possible extra charges associated with legal fees for varying the terms of the contract and registering the new property with the Lands Titles Office. While it doesn’t sound like much, changing the security over which your existing loan contract is written is technically a contract variation. Sometimes the fee for making the change is captured under the heading of legal fees, other times it is not, so it’s important to know the total cost of making a change.
But why stick with your current loan when you have the chance to go loan shopping again? There are a couple of sensible reasons:
1. To begin with, you won’t have to worry about early termination charges, deferred establishment fees or break costs if the loan was set at a fixed interest rate.
2. You also won’t have go through another loan hunt or have to pay a fresh set of establishment fees.
Before you get excited about the savings that are possible with portable home loans, it’s also important to realise the limitations of them.
Many lenders will specify that the loan amount must remain the same with the new home. If you are thinking of upgrading your home (and let’s face it, that’s why most people move) you are likely to require a larger loan and in many cases this means you will need a completely new mortgage.
Even if the new loan you require is no more than your existing loan, the next factor stops many borrowers in their tracks: many financial institutions stipulate that you must settle the sale of your existing property on the same day as you settle the purchase of your new property. Just like settlement on your first home but twice the fun!
The lender’s argument (and it is a fair one) is that this ensures that the loan has underlying security at all times. Under these guidelines, settlement date is the date that payment to the previous owner is finalised and the new owner takes title over the property and draws down on their loan.
Picture it as your lender not giving you back title on your first home until you hand them title to your new home.
2. Leaving it behind
Borrowers who can’t retain their existing loan because of these restrictions, or those that want to take the opportunity of finding a better deal, must look for a completely new home loan. Note that you will require a new loan, not necessarily a new lender.
When a home loan is established, many people find themselves using other products and services provided by the same lender. For example, you may open a transaction account, purchase a credit card, arrange your home insurance or even do your share trading through your lender’s facilities. It’s also likely that you will either receive a discount (or at least avoid some fees) by doing so. Imagine the hassle of having to reorganise all of these products and services with a new lender. It doesn’t have to be this way.
The cost of switching lenders cuts both ways. While you may save a little by having all of your finances in the one place, so too does your lender. As much as they would probably hate to admit it, they would generally be sorry to see you go – particularly to a competitor – and may be receptive to ideas you have to keep you a loyal and happy customer.
The best way to pull at your lender’s heart-strings is to ring and ask them to calculate the total cost of paying out your loan because you are buying a new home and are going to switch lenders. Most customer support staff are instructed to ask why you are considering switching, and may even provide some ideas of the discounts available should you stay.
Take notes, thank them for their time and await their answer – which may take a few days and will preferably be broken down to specific costs and forwarded to you in writing. This is where the negotiation really begins. When trading in your car, it’s important not to get carried away with what you are being offered on your old bomb, it’s the amount of money that you need to pay to drive away in a shiny new car that matters.
It’s exactly the same when negotiating a new home loan.
Let’s go shopping
Armed with the best deal your current lender can provide, it’s time to revisit the world of home loans and see what has changed since the last time you signed on the bottom line.
You are likely to run across a number of new products that weren’t widely available when you applied for your home loan. Lines of credit, offset accounts, direct salary debiting – the choices can be daunting. See our comprehensive article on the different loans types available on page 57, and be conscious of the fact that you need to compare like with like. The basic variable home loan that you may have had cannot seriously be compared to a ‘bells and whistles’ loan that does everything except make you breakfast in the morning. Determine the loan that meets your needs and only then begin to make cost comparisons.
Once you have determined the best loan type for your needs, use the tables and daily website updates of Your Mortgage to determine the cheapest possible loan available. Make a note of the key features of this loan, pull out the list of discounts that your current lender says they will make if you stay and start doing the sums.
Remember that entry and exit fees are not nearly as important as ongoing fees and interest rates when it comes to determining the cheapest loan for you. Saving $400 on combined entry/exit fees is a false economy when compared to the savings that can be made in the long run. For example, the difference between no account keeping fees and an $8 a month fee slug amounts to $2,400 over the course of a 25-year loan. A loan charging just 0.1% more in interest will cost an extra $1,940 for a loan of $100,000. Makes those entry and exit fees pale into insignificance, doesn’t it?
Time to head back to your original lender and see where you stand. Explain to them that you have gone shopping. Tell them that you have found a fabulous loan and that you are just about to sign up. They are likely to remind you of the (hopefully) generous discounts they are prepared to offer you to stay.
Explain to them that ongoing fees and the interest rate are much more important to you and that these are what you would like to negotiate. The only way from here is forward!
If the thought of shopping for a new lender and loan doesn’t appeal, it is certainly possible to stay with your existing lender and either increase the original loan principal or take out a newer, larger loan.
Borrowing an increased amount, regardless of the method chosen, will increase your loan to value ratio (LVR). If you are borrowing more than 80% of the value of the new home, you can generally expect to be slugged with lenders mortgage insurance. Certainly not a pleasant surprise, and not the last of the extra costs of coming back for seconds.
stamp duty on the mortgage will also be payable on the difference in the two loan amounts. Some states offer a discount or exemption on stamp duty when refinancing, others do not. It’s best to check with your local Office of State Revenue to see exactly what you are entitled to.
Being savvy will save you
Ultimately, like any important decision, the best course of action is different for every individual – but regardless of your family and financial situation, taking the time to properly evaluate your options and investigate the pros and cons before buying your second home will save you time, money and major drama.
It’s also vital to be aware of any pitfalls that might lie along the way – and Inspired Finance Group’s Smith adds a few tips and a quick warning to those venturing back into the property scene for seconds:
1. Never believe what the selling real estate agent tells you. He may not be lying, but because he doesn’t work for you, his answers will be based on achieving a sale
2. Ring the local council and find out what is happening in the area or if there are any development applications close by. It would be sad to buy, only to find that some future highway will be passing by your back fence. I realise that is an extreme example, but such things do happen. A quick check of a council’s website will quite often reveal future plans for an area
3. Walk around the neighbourhood and see what is happening. If possible talk to a local or neighbour and ask them about the street and the area
4. Get a solicitor to check the contract for any strange items
5. Make sure you get a pest and building inspection within the cooling off/due diligence period
6. Ask the real estate agent why the buyers are selling or if the property has been on the market for long. This information may help you negotiate a better deal
7. Visit several times: you always see things you didn’t see before.