Should you buy before you’ve sold your home?

When you’ve found “the home” for the second or third 😊 time, knowing whether to buy or sell first (or even keep your existing property) can be a tricky decision.

Unlike the first time you purchased, you already have a home loan.

When buying your next home there are a few options available to you:

Option 1: Buying a house before selling.

Buying before selling can offer some advantages. If the market is steady or rising, you could save on your next home by locking in today’s prices, while letting the value of your existing home appreciate. Also, if you see a place that you can’t live without, buying before selling your home means you won’t miss out to other buyers.

However, there is no guarantee your current house will be sold. If there are no buyers or your property is passed in at auction, you’ll need to juggle not only one, but two home loans until you do sell. If you have the funds behind you and a good guaranteed income, this may not be a concern, but for some homeowners, this arrangement can cause a major financial strain.

With that pressure, you may feel rushed to sell your current home, and accept a price below your expectations.

There are ways to minimise the chances of this happening. For example:

• You could make your purchase subject to finance – this clause gives you time to organise a new loan for the property you’re buying.
• You could negotiate a longer settlement, for example from 30 to 90 days, which would give you three months to sell your property.
• You could rent out your old home to guarantee some rental income.

Option 2: Selling before buying.

If you’re not in a rush, you can wait until your home is sold before making an offer on your next home. This option will avoid any of the pressures that may have experienced with option 1.

With money in the bank from the sale proceeds of your current home, you’ll also have a firm idea of how much cash can be spent on your new home – and how much you’ll need to borrow.

If you want to earn additional income while searching for your next home, you can invest your sale proceeds in a high-interest savings account!

If you plan on taking this approach, be sure to consider where you will live while you find a new home. Whether you stay with friends or family, Airbnb or rent for a while, you will need to take into account the cost and inconvenience of moving twice. Budgeting these details in advance means you’ll know exactly how long you can wait for that perfect home to come along.

Option 3: Buying and selling at the same time.

You can sometimes be lucky enough to find the right home and a committed buyer at the same time.  We would recommend a review your current loan and refresh if need be to take advantage of the home loan offers and interest rates available at the time.

Alternatively, you could transfer your existing home loan to your new home – known as substitution of security (or loan portability). However, in this case, there are a few issues you need to consider:

• You need to arrange both the purchase and the sale to settle on the same day – although a great solicitor can help make this happen.
• Your loan account will remain the same with the same repayments.
• You may not be required to complete a full loan application with your bank unless you require additional funds.
• If you need to borrow more for the new home, an additional loan account can be introduced (subject to affordability)
• If the new mortgage is over 80% of the property value (of the new property) you’ll have to pay Lenders Mortgage Insurance (LMI).

Option 4: Make your current home an investment property

You might have decided to permanently rent out your current home, making it an investment property. In this case you have now created another income which can be very beneficial but it also has some things you need to consider:

• The extra money coming in will increase your ability to borrow more to purchase another property for investment or to live in.
• You will now be entitled to claim tax deductions on some expenses associated with maintaining this property, such as Council and Water rates, repairs and maintenance costs.
• Have your home valued when you move out and it becomes an investment property. This is important for a number of reasons:
  • When selling your home as an owner occupier, any profits made are tax free.
  • When selling an investment property at a profit then Capital Gains Tax will need to be paid .
  • In this case, your profits when you sell this property will only be taxed for any increase in value from when your home becomes an investment property and your proof will be clearly evident from this valuation.
• We strongly recommend that you engage the services of a good accountant that is well experienced with property investment to give you advice and maximize your tax benefits

So when you decide that it’s time to move, please call us for an independent review.  We will help you to evaluate your circumstances and help you decide the best option to help you move forward.

Purchasing a property is a major financial step and buying before selling your home is not without its risks.

By taking the time to properly consider all of your options and speaking to us first, buying your next home can be an exciting and financially stress-free experience (as it should be).

If you would like to get some advice specific to your circumstances, please feel free to call us on 8004 2222 or book in a time to chat with George.

PS  This article is prepared based on general information. It does not take into account individual financial or property objectives or needs and is not financial product or investment advice.