Changing to a new home
For almost everyone there comes the time when we want to / need to change our address.
Sometimes it’s a move within the suburb – and sometimes it’s a different area altogether. A change of needs, an extra room or a tree change…the many varied reasons all have the same underlying concerns:
How do we go about it?
Can we buy before we sell?
Can we afford it?
What if we sell first and we can’t find anything we like?
There are a few ways of achieving this, ultimately we don’t want you out of the property market for too long, however sometimes it even makes sense to sell, let the dust settle and test the suburb while renting.
Simultaneous sale and purchase
Nirvana. When it all goes to plan. Quite literally this would mean you sell your current home and buy a new home with the settlement on both to happen at the same time. Essentially you replace one home with another.
Pro’s – simple and no interest bill in the meantime.
Con’s – should you have any hiccups on the day settlement may be cancelled and essentially you can be in a truck outside your new home with all of your life and furniture – with the only option to go home and try again another day. Hiccups could involve things that are outside of your control- for example the purchasers bank not being ready on the day, which causes a chain of missed settlements.
Another consideration is you will be obliged to exchange (commit unconditionally to your new purchase) – and pay a deposit – on the new home after a cooling off period. You should not exchange before you have an unconditional sale on your place, and in a perfect world you would request the purchaser to release the deposit they pay you – for you to use on your new purchase. Failing this you could use a deposit bond. In either instance let your conveyancer / solicitor know in advance that you will need to use one of these options if you don’t have the cash spare for 5%/10% of the purchase price.
HINT – to improve your chances of simultaneous settlement consider offering an extended settlement to your purchasers which allows you the time to find your new home without having to move into rental accommodation.
Purchase and retain your existing home as an investment
Also a simple option, allowing you to avoid the sale process altogether. Using the equity in your current home and the potential rent you may be able to qualify to buy the new property and avoid the sale costs and process altogether. And even if it doesn’t work out – you could always sell down the track when you’ve settled in and love your new home.
Pro’s – straight forward, no need for open homes!
Con’s – qualifying for the loan could be harder as banks don’t take all of the rental income into consideration and with rules tightening it is a little harder than times gone by. Also – it may not be the ideal property to have as an investment for numerous reasons; the style / maintenance needs, not tax effective, not attracting a great rent return. This could be a temporary option.
What a bridging loan does is essentially gives you the finance to buy a new property without your old home being sold, yet. This gives you confidence to know where you are going to move to when you put your home on the market.
Bridging loans of the past were known to be scary beasts with excessive interest rates. Bridging today provides competitive interest rates and features in a facility that makes buying and selling a lot easier. Most bridging loans will allow you to make minimal repayments on the loan while you’re selling (although I am going to tell you it’s clever to continue to pay as much as you can) because interest is allowed to add to the loan for a particular time frame – usually 6 -12m.
The actual loan itself is assessed on the basis of whether or not you are likely to be able to afford the ongoing repayments of the “end loan”; the loan you will have once your current home is sold, so you don’t have to qualify for the whole debt with two homes. Now I have used the term “end loan”, this is something banks calculate in bridging and it’s more than you think you’re going to owe – because the bank will work on a worse case basis.
Basically their calculation of end debt comes from:
· The lenders conservative valuation of your current home
· Less a 10-15% margin in case you have to sell quickly
· Less 6 - 12 months worth of interest to be added to the loan
· Equals a higher end loan amount than you anticipate
And because of this it can be difficult to qualify unless you have a lot of equity in your current home, (but let us have a look at the numbers for you anyway). And remember that contributing to the interest bill, selling quickly, and getting the full price all obviously reduce the end loan that you will actually have ongoing.
The other strategies to note (to take pressure off) are offering extended settlement to the sellers of the place you’re buying – if they don’t know where they are moving to this is very attractive to them.
HINT for bridging to work well you need a lot of equity, remembering the discount the lenders take and essentially you’re borrowing against the equity that you have – to avoid mortgage insurance, to even qualify at all – it’s much better if you have a good chunk of available equity.
Pros – simple and no time pressure to buy or sell in a terrible hurry
Cons – it can be nerve wracking to sell, and if you don’t sell in time you could have a decent interest bill growing. The good thing is most lenders wont pressure you to sell even as you hit the typical 6 month mark as long as you can show you are working towards a sale – and at this time it may be worth considering options like auction or additional marketing.