Making the move from one property to another is a necessary step in most homeowner’s lives – if upsizing isn’t inevitable, downsizing surely will be – but it’s not one people are born prepared for. Educated homeowners armed with a bit of strategy, however, should be able to find their homes happy new owners while once again filling that role themselves.
How do you sell and buy a home at the same time?
Most people have three main goals when buying and selling a home at the same time:
- To get the highest price possible for their current house
- To buy a new house as cheaply as possible
- To get through the process with as little pain as possible
The first steps you need to take before selling for a profit is improving your home and ensuring you 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. Make extra one-off payments, pay a little more each time, pay fortnightly rather than monthly and, obviously, take advantage of all the mortgage-busting tips on yourmortgage.com.au to pay off your loan faster.
Once you’ve prepared your property and your finances, you may still be left wondering whether to sell your home first and then buy your new one or buy your new house and then sell your current one.
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 your possessions from one home to another. But this may cause rather dire financing issues. “When and whether to sell your home 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.
“In a buyer’s market, I would always suggest you sell your home 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 that buying first might be the best option, as your property should be sold quite quickly. He warns against allowing any personal feelings about your home to cloud your judgement. Remain objective and view your property from a prospective buyer’s viewpoint.
“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,” says Smith.
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, 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 that 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.”
Selling your home first
The logical order is to sell your home first and buy second. This way you know exactly how much money you have to spend. There is a long history of homeowners who overestimated the worth of their current homes and purchased from an optimistic position only to find themselves in dire financial straits. Selling first means you will be 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.
One of the biggest risks you will face if there is an extended gap between sale and purchase is that rising property prices will mean you get less for your money as time goes by. If you are able to invest the equity you receive from your sale, you may be able to earn a return for the interim period, but this is generally only advantageous for owners who have built up a significant amount of equity.
For example, if you have paid off approximately 20% of the purchase price of your currently owned property, say $80,000, you could earn a return on this amount while waiting to purchase your new home. If you were earning 5% on your money in a cash management account and the situation dragged on for a year, you would earn $4,000 on your $80,000. It’s a decent return, and will help offset the increase in property prices that have occurred during that period, but if prices have increased by 10% during that time, you’ll still be paying thousands of dollars to make up the difference.
Buying your home first
For those who are financially capable, buying your home first has its advantages. Primarily, it can dispense with the hassle of renting in the interim period. This is often a major concern for the elderly, owners with young families and those with 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. But there are several disadvantages to buying before you sell:
- 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.
- In a slow market it may take more time than you had estimated to sell your first house.
- 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.
Loans touted as ‘bridging loans’ have various guises. It’s important to understand how these loans operate so you can determine whether they will be suitable for your particular financial situation. They deserve extra attention here.
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.
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 involving 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 net 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.
Be very careful. 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, there are other options for bridging the financial gap between purchase and sale.
Deposit bonds are an excellent alternative to 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.
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.
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.
In general, deposit bonds cost around 1% of the deposit amount required. It is possible to arrange deposit bonds within 24 hours, which can be done by fax or mail. Alternatively, you can purchase deposit bonds through most lenders or real estate agents at no additional charge.
Rent or Sell?
If you have the option, buying a second home as an investment property, or to enable you to rent out your first home and move into your second, could be an alternative worth looking at. It depends on how the numbers stack up.
The decision to keep your 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.
Here are four scenarios that may help clarify the rent-or-sell dilemma.
Scenario 1: A growing family decides to upsize
While this can be a fantastic decision that demonstrates they are planning for the future, these homeowners 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 while maintaining the old property as an investment, they should get the right tax advice to take them down that path. But if they believe doing so would stretch them beyond their means, then their best option is to watch the real estate market, sell their existing place at a higher price (factoring in a longer settlement period, perhaps) and then purchase their new house as the market falls a little.
Scenario 2: Older empty nesters downsize
If an older couple is able to afford 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 cash-flow positive for them.
They will 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 3: An owner with substantial equity wants to move to a better location
Keeping the existing property will be great if the owner is looking for a positively geared property, but not if she’s trying to achieve tax savings.
Depending on her circumstances and what the market is doing, she may be better off converting her old home into a rental property as the cost of selling and buying new property is prohibitively high. At the same time, if her old property is located in a high growth area, then holding on for a few more years may yield handsome capital gains.
Scenario 4: An owner struggling with current mortgage repayments needs to downsize
This owner needs to put a plan of action before making any substantial decisions. Seeking financial advice is a good place to start, as is letting his existing lender know that he is having difficulty making repayments. This will allow the lender to provide some grace for him as he has shown a modicum of responsibility by notifying the lender in the first place.
Hopefully, this owner will sit down with his financial advisor and look at the options of extending the term on his existing loan in the interim period, vacating the property and renting instead while putting a tenant into his property.
He should also look to consolidate any other debts that may be hindering his ability to repay his mortgage. If once he’s looked at these options and he has decided that he has no choice but to sell, he should try to sell in a stable market to achieve the best sale price.
Your mortgage: take it with you or leave it behind?
One more major consideration for homeowners looking to make a move is what to do with the mortgage attached to their current home. Whether you take your mortgage with you or leave it behind, the path you choose shouldn’t be too daunting. But it could cost you money.
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. Some portability fees, which can start at $300 and often reach considerably higher, can be just as costly as completely refinancing your loan.
There are also possible 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 of an undertaking, 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, so it’s important to know the total cost of making a change.
Keeping your loan is often the most convenient choice. 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 and you won’t be required to go through another loan hunt or have to pay a fresh set of establishment fees.
Before you get excited about the potential savings associated with portable home loans, it’s also important to realise their limitations.
Many lenders will specify that the loan amount must remain the same with the new home. If you are thinking of upgrading your home, you will likely require a larger loan. In many cases this means you will need a completely new mortgage.
Even if the new loan you require is no larger than the existing one, many financial institutions stipulate that you must settle the sale of your existing property on the same day you settle the purchase of your new property. The lender’s argument is that this ensures the loan has underlying security at all times. Under these guidelines, settlement date is the date that payment to the previous owner is finalised, the new owner takes title over the property and draws down on their loan.
Leaving it behind
Borrowers who can’t retain their existing loan because of these restrictions, or those who want to take the opportunity of finding a better deal, must look for a completely new home loan, but 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. (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 avoid certain fees by doing so. Having to reorganise all of these products and services with a new lender is an unnecessary hassle. But considering a move to a different lender can be beneficial. A reputable lender will generally be sorry to see you go – particularly to a competitor – and may be receptive to ideas you have to keep you loyal and happy.
The best way to tug at your lender’s heart-strings is to 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 should ideally only take a few days, be broken down into specific costs and forwarded to you in writing. This is where the negotiation really begins.
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 how the landscape differs from the last time you signed a mortgage.
You are sure to run across a number of new products not widely available when you applied for your current home loan. Lines of credit, offset accounts, direct salary debiting – the choices can be overwhelming.
To make sense of your options, 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 here at Your Mortgage to determine the cheapest possible loan available. Make a note of the key features of this loan and then compare them to the list of discounts that your current lender says they will make if you stay. 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 hollow victory 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, whereas a loan charging just 0.1% more in interest will cost an extra $1,940 for a loan of $100,000.
Head back to your original lender and see where you stand. Explain that you have gone rate shopping and that you have found a fabulous loan you are prepared to sign. Tell them that your key concerns are ongoing fees and the interest rate and that these aspects are what you would like to negotiate.
If the thought of shopping for a new loan or lender doesn’t appeal to you, it is 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 saddled with lenders’ mortgage insurance.
Stamp duty on the mortgage will also be payable on the difference between the two loan amounts. Some states offer a discount or exemption on stamp duty when refinancing, others do not. Check with your local Office of State Revenue to see exactly what you are required to do.
Being savvy will save you
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. Inspired Finance Group’s Josh Smith suggests seven steps homeowners should take before wading back into the market:
- Take with a grain of salt what the selling real estate agent tells you. He may not be lying, but he doesn’t work for you. His answers will be based on achieving a sale.
- Contact your local council and find out what is happening in the area, specifically 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. A quick check of a council’s website will quite often reveal future plans for an area.
- Walk around the neighbourhood and see what is happening. If possible, talk to locals and ask them about the street and the area.
- Get a solicitor to check the contract for any questionable items.
- Make sure you get a pest and building inspection within the cooling off/due diligence period.
- 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.
- Visit a property several times. You will always see things you didn’t see before.