Making the move from one property to another is a part of life for most homeowners. If upsizing isn’t inevitable, downsizing probably will be - but it’s not always something people know how to do.
It can be difficult to navigate the moving process when you already own your home. Do you buy and then sell, but then have to worry about financing the new purchase? Alternatively, should you sell and then buy, but risk having nowhere to go once your sale is finalised?
There are a few strategies homeowners tend to go with when selling one home and buying another, which we will discuss to give you a more informed understanding of all your options.
In this article:
- How do you sell and buy a home at the same time?
- Selling your home first
- Risks of selling before buying
- Buying your home first
- Risks of buying before selling
- What is bridging finance?
For most people selling and buying a property at the same time, they want to:
Get the best price possible for the house they are selling;
Buy a new house for an affordable price, so they’re not making a loss;
Get through the entire process with as little stress and trouble as possible.
Before putting up the ‘for sale' sign, you might want to take a quick look at the property’s condition. Is it an older home? Does it present well? You could consider some minor home improvements, like a fresh paint job all the way up to a kitchen revamp, if you’re looking for the biggest capital gains and, ultimately, more money in your pocket.
Now onto the debacle: to buy and then sell, or to sell and then buy. Ideally, you want to do both around the same time. Often, you can ask for a few special conditions to be added to the contracts so that both properties settle at the same time.
A ‘sunset clause’ essentially makes the sale of your property conditional upon the purchase of your new one. Additionally, a ‘contemporaneous settlement clause’ will mean that the property you are buying and the property you are selling will settle at the same time.
Buying and selling at the same time has its constraints, however, and can become quite complicated. If one contract is delayed, the other subsequently gets delayed. However, it is definitely possible to buy and sell in one go.
John Smith, CEO at Inspired Finance Group, said that the question of when and whether to sell and then buy or vica versa is the ‘eternal question’.
“[It] 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,” Mr Smith said.
“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,” Mr Smith said.
When you are selling your existing home and buying your new one, 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, Former Head of Marketing and Consumer Advocacy at Resi, signals the difficulty of a ‘double move’, and points out that it can be difficult to reenter the property market once you’re out.
“You need to have your finger on the pulse so you don’t miss out on the same market,” Ms Montgomery said.
By selling first and buying second, 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 stay in a hotel or with family, and either sell your furniture with your home or put it into storage. Storage for an extended period of time can be costly, and if it ends up taking longer than expected to find your new home, this can be unrealistic.
To avoid both of these options, it could be helpful to request a lengthy settlement period, to hopefully give yourself enough time to find a new home before you need to move out of your old one.
Mr Smith suggests that in a buyer’s market, it’s best to 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,” Mr Smith said.
“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.”
One of the biggest risks of selling first is that in an extended gap between selling and then buying, inflating property prices might become an issue. This means that it might become more and more expensive to re-enter the market, which isn’t ideal. You could invest the equity from your sale, but this comes with risk and might not be suitable.
Let’s use a hypothetical example to illustrate how this would work practically. Let’s say you paid off 20% of your sold property, $80,000, and you invest this money into a high-interest savings account. If you were earning 3% interest over one year, you’d earn $2,400. But if property prices in the area increased by 10%, you’d still end up worse-off by waiting to buy.
For those with the financial capacity, buying first then selling has its advantages. Mostly, it can avoid the hassle of renting or being otherwise displaced for the interim period.
In a seller’s market, Mr Smith suggests buying first as the best option, because your property should sell quite quickly.
He warns against allowing any personal feelings about your home to cloud your judgment, to remain objective, and to view your property from a prospective buyer’s viewpoint.
You might have found your dream home before even putting yours on the market, or you’d just like to avoid the hassle of selling and then buying, but there are still risks involved.
There are a few cons of buying first and selling after. Most notably, there are some financial risks involved that can prove tricky.
Firstly, you might feel pressured into selling your property quickly, which might mean you accept a lower offer or make a rushed decision.
Secondly, in a slower market, it might end up taking longer than expected to sell your home, which can end up costing you.
Lastly, if you have bridging finance, you’re basically paying off two mortgages for the period in which you own the new home and still own your previous home.
If you want to buy and then sell, but you don’t have hundreds of thousands of dollars casually available to you, bridging finance might be a good solution for you.
A bridging loan is designed to ‘bridge’ a short-term gap in funding, and its mainly used in this exact situation. Bridging loans are relatively short, generally ranging from six to 12 months, because your old home is expected to be sold within this time frame. Additionally, they’re usually ‘interest-only loans, as this way you’re not continuing to pour equity into your older home and your new home, which means you’re needing to repay less.
When you take out a bridging loan, a few things will come into play when calculating what is known as your ‘peak debt’. Mainly, how much you owe on the old property, as well as how much you’re purchasing the new home for. These two combined will allow lenders to decide how much you have the capacity to borrow.
Let’s use a quick hypothetical example. If you still owe $300,000 on your old home, and your new home is $600,000, your ‘peak debt’ is $900,000. Typically, lenders will only allow you to borrow up to 80% of this ($720,000), taking into account the likely sale price of your old home and costs of selling.
Bridging loans don’t come without risks. For example, if you’re nearing the end of your bridging loan and haven’t yet sold, you might choose to accept an offer less than what you’d hoped for. Before jumping into taking out a bridging loan, it’s important to consider your own financial situation and whether it’s right for you.
This article was originally written in May 2010 and was updated on October 26, 2021.