Buy or Sell First ?

Often it is difficult to coordinate the timing between selling your current home and buying your next. Whether to buy or sell first is up to you but most people cannot afford to buy before they sell. However you may find your dream home before your home sells.

Both methods have advantages and disadvantages but the choice depends on your individual circumstances:

• Selling before you buy or
• Buying before you sell.

Selling before you buy

Selling before you buy is probably the least risky choice. It ensures you know your budget and the time period for your search. It also means that you will not be forced into accepting a lower offer on your property in order to reduce your financial burden.

The only risk is that if you do not find a property in time, you will be forced to rent.

Buying before you sell

You may need a loan to cover you if you do not have the deposit for the new property before you sell your current property. This is where bridging finance comes in. Before you apply for this interim finance there are few things you should know:

• About bridging finance
• How it works
• Raising the deposit

About bridging finance

Bridging finance is a loan that enables you to cover the purchase of your new home when you have not sold your existing property. It is designed to cover the full financing of your new home by using both properties as security until you sell your existing property and extinguish all or most of the debt. This means you are effectively paying off a loan on two properties until your home sells. This could be expensive.

How it works

Many lenders have variations in how their products work but typically a lender takes on both mortgages. For example, a lender allows you to borrow up to 85% of the total value of the properties. Paying interest on this new (and possibly very large amount) could be difficult so the interest is capitalized. This means that instead of paying the interest on the full amount, the lender calculates the interest on a preset minimum or on the end loan. The end loan is the estimated debt remaining after you sell your existing home.

However, you are still charged interest on the full amount. The balance of interest owing is capitalized and paid off as a lump sum when the property sells. If it takes six months to sell your existing home or you don't achieve the price you expect you may end up with a considerable debt and less equity than you anticipated.

In buying before you sell, you run the risk of being under pressure to sell quickly and accept a lower price for your current property in order to extinguish the debt rather than wait for a better price.

Ask if the vendor will accept a long settlement period before you sign the Contract of Sale. This will give you time to sell your property and perhaps avoid the need for bridging finance.

Bridging finance is generally offered at rates similar to the standard variable home loan rate and is intended to be a short term loan.

Raising the deposit

Even if you have bridging finance you will still have to pay some upfront costs such as the deposit on your new property, stamp duty and legal/conveyance costs. A deposit bond can be used for this.

A deposit bond is a guarantee by the lender that the purchaser will pay the deposit on settlement. While this means that the full 10% deposit is guaranteed, it also means that if you default and do not go ahead with the purchase, the issuer of the bond still pays the vendor but will then pursue you, as a defaulting buyer, for this amount. If you don't go ahead with the purchase you will still lose your deposit just as if you had paid cash.

A fee of approximately one per cent of the bond amount required is charged.

Bonds can cover up to a maximum of 10% of the property purchase price, i.e. the deposit. The limit to the amount which can be guaranteed depends on your circumstances.

If the vendor will not accept a bond, you may have to find the deposit elsewhere. You may have to dip into your savings or realize other assets or investments.

You may also consider applying for an overdraft or a personal loan but the interest rates on these products may be high.

A home equity loan or a revolving line of credit on your existing loan are other possibilities.