Buying Before You've Sold? Understanding Your Home Loan Options

Found your next home but haven't sold your current one? Here's what to know about bridging finance, using your equity and buying with a sale condition.

You've found a home that ticks the boxes. Maybe it's got the extra bedroom, a bigger backyard or a better location. There's just one problem: you haven't sold your current home yet. This is common for homeowners upgrading or moving around Newcastle, Lake Macquarie and the Hunter.

Option 1: Sell Your Current Home First

Selling first can provide greater certainty. Once you've repaid your existing mortgage and covered selling costs, you'll have a clearer idea of the funds available for your next purchase. You may also avoid financing two properties at once.

The trade-off is timing. You might need temporary accommodation, a longer settlement or two moves if you haven't found your next property. Ask your selling agent about settlement flexibility.

Option 2: Buy First Using Bridging Finance

Bridging finance may help eligible homeowners buy their next property before selling their existing one. It's temporary funding designed to cover the gap between the purchase and the sale, subject to lender assessment.

How does bridging finance work?

Imagine your current home is worth approximately $900,000, with $400,000 remaining on the mortgage. You've found your next property for $1,100,000. That's around $500,000 in gross equity, but it isn't the same as cash available for the purchase.

Depending on the lender and structure, your borrowing during the bridging period may include the existing mortgage, funding for the new purchase and associated costs. This is often called your peak debt. Once the original home sells, net proceeds are generally applied to reduce the balance. The remaining mortgage is your end debt.

Bridging finance can allow you to secure a property and move directly into it without temporary accommodation. But it's not automatically the best solution.

Risks include a slower-than-expected sale, a lower sale price, extra interest and fees, time limits and restrictions on loan structures. Some lenders allow interest to be capitalised during the bridging period, which increases the amount owing. Lenders also differ in how they assess equity, peak debt, end debt and serviceability.

Before committing, understand both the peak debt and the likely end debt, including what happens if the sale doesn't go to plan.

Option 3: Buy Subject to Selling Your Existing Property

You might negotiate a contract conditional on selling your existing home within an agreed timeframe. That may reduce some financial uncertainty, but sellers don't have to accept such an offer and may favour buyers who can proceed without that condition.

Conditions and deadlines depend on the contract. Speak to your conveyancer or solicitor before signing. A sale condition isn't a substitute for finance assessment.

Option 4: Using Equity in Your Existing Home

Equity is the difference between a property's estimated value and the debt secured against it. A $900,000 property with a $400,000 mortgage has approximately $500,000 in gross equity.

However, gross equity isn't the same as usable equity or borrowing capacity. What you can access depends on the lender's loan-to-value ratio requirements, valuation, credit policy and your financial circumstances. Accessing equity increases debt and repayments. If you keep both properties, the lender will generally assess your ongoing commitments.

Don't Forget the Other Costs

Allow for real estate agent fees, repayment of your existing mortgage, transfer duty where applicable, conveyancing, building and pest inspections, moving expenses, lender fees and the possibility of maintaining two properties temporarily. For an apartment or townhouse, ongoing strata levies may also apply.

What If Your Home Sells for Less Than Expected?

If you expect $950,000 but sell for $900,000, that's $50,000 less in gross proceeds before costs. Depending on the finance structure, this could leave you with a larger end mortgage, higher repayments or a need to contribute additional funds.

Bridging lenders may apply conservative sale-price assumptions. It's sensible to model a lower sale price or longer selling period rather than relying only on the ideal outcome.

So, Is It Better to Buy or Sell First?

There isn't one answer for everyone. Selling first may provide certainty. Buying first may offer flexibility but introduce additional financial risk. Bridging finance, sale conditions, settlement negotiations and other lending structures are all worth investigating depending on your circumstances.

Before You Make an Offer, Know Your Numbers

If you're upgrading, downsizing or moving around Newcastle, Lake Macquarie or the Hunter, have the finance conversation early. Understand the deposit, buying costs, available equity, potential repayments and what happens if the timing doesn't line up.

At Axiom Financial, I can help you explore the lending options, understand the numbers and identify structures worth investigating. Found your next home but haven't sold your current one? Give me a shout and let's work through your options before you make an offer.

Rusty Brown — Axiom Financial. Finance founded on principle.

General information only. This article does not take into account your personal objectives, financial situation or needs. Loan availability, bridging structures, eligibility, fees, interest rates and repayment arrangements vary by lender and require assessment. Property values and sale proceeds are illustrative. Seek legal advice about contract conditions and settlement arrangements.