Photo by: Terra Mallorca
Which is better? To make an offer and then put your house on the market? Or, get an offer before looking for your next dream home?
Moving from one property to another may be a much-needed step in most homeowners’ live—if upsizing isn’t inevitable, downsizing may be. A homeowner must be educated and armed with a bit of strategy to find their homes happy new owners, while once again filling that role themselves.
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 step you may have to take before putting your home on the market is making some improvements. You may also have to ensure that you have paid off as much as possible on your current mortgage so that the equity in your home can be converted into cash. Consider making extra repayments if your mortgage allows it.
Some other strategies that may help you pay as much as you can for your mortgage are consolidating your debts to avoid paying higher interest rates and saving money by forgoing luxuries.
Once you’ve prepared your property and finances, you may still be left wondering whether you should sell your home first and then buy a new one or buy your new house and then sell your current one.
Different markets, different approaches
From a logistical perspective, closing on a new property should occur a few days before closing on the old, minimizing the hassles involved in moving your possessions from one home to another—but this may cause dire financing issues.
In a buyer’s market, it may be ideal to sell your home first. The last thing any homeowner wants is to pay interest costs on two mortgages, or have their equity eaten up because they cannot sell their home.
However, in a seller’s market, buying first may be the best option, as your property should be sold quite quickly. As a seller, you have to remain objective and view your property from a prospective buyer’s viewpoint.
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.
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 may 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 may 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 may have to 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 can 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.
Buying your home first
For those who are financially capable, buying your home first has its advantages. It may 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 may 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 ‘bridge 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
Bridge loans
A bridge loan is a temporary loan option designed to assist homeowners “bridge” the gap between the time their current dwelling is sold and their new home is purchased. This loan type enables homeowners to use their current home’s equity to pay the down payment for their next house while waiting for their existing home to sell. Bridge loans are short-term loans, usually six-months in length.
While bridge loans may help you buy a house before you sell your old one and use your current house’s equity for a down payment, there are still obvious dangers you have to be aware of.
Interest can be more costly in a bridge loan than traditional financing. Your existing property may also take longer than expected to sell and you may 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, but you may also find yourself selling for less than you hoped for in order to extinguish the bridging finance, leaving you with 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.
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.
Here are three 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 s 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 struggling with current mortgage repayments needs to downsize
This owner needs a plan of action before making any substantial decisions. Seeking financial advice may be a good place to start, as is letting their existing lender know that they are having difficulty making repayments. This will allow the lender to provide some grace as the owner has shown a modicum of responsibility by notifying the lender in the first place.
Hopefully, this owner will sit down with a financial advisor and look at the options of extending the term on the existing loan in the interim period, vacating the property and renting instead while putting a tenant into his property.
The owner should also consider consolidating any other debts that may be hindering their ability to repay the mortgage. After looking at these options and the owner has decided that they have no choice but to sell, they 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 may 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 may be a very simple and cost-effective solution, but not all loans are portable.
Keeping your loan is often the most convenient choice. You won’t have to worry about early termination charges 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.
Limitations
Before you get excited about the potential savings associated with portable home loans, it’s also important to realise their limitations.
Lenders may specify that the loan amount must remain the same with the new home. If you are thinking of upgrading your home, you may require a larger loan. In many cases, this means you will need a completely new mortgage.
- Leaving it behind
Borrowers who can’t retain their existing loan because of 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 also 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.
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.
It may be a good idea to sit down with your mortgage broker and discuss what your choices are before deciding whether to take your mortgage with you or not. Don’t have a mortgage broker yet? Find one near you.
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 some new products not widely available when you applied for your current home loan– 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, 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.
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.
Topping up
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 CMHC mortgage loan insurance.
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.
Article by: Which Mortgage