Buying Before Selling Your Current Home: What to Consider

Finding the right next home can feel too important to risk losing, particularly when selling first could leave your family in a rental or force a rushed purchase later. Understanding how buying before selling may work could help you consider the finance, timing and risks involved before making an offer.

Depending on their circumstances and lender requirements, some Australian homeowners may be able to purchase their next property before selling their existing home.

Buying before selling: start with your financial position

Before attending inspections or making an offer, establish the financial position you would have if you owned both homes at once. This is different from simply checking the price range of properties you like.

A lender will generally look at your current mortgage balance, the estimated value of your existing property, your income, regular living costs, other debts and the likely repayments on the new loan. They will also apply their own lending criteria and serviceability assessment. The amount of usable equity in your current home is a major part of the picture.

Equity is the difference between your property's value and what you still owe on the mortgage. For example, if your home is worth $900,000 and your loan balance is $450,000, you have $450,000 in equity before allowing for selling costs. Not all of this may be available to access. Lenders usually limit borrowing to a percentage of the property's value, unless lenders mortgage insurance is involved.

It is also wise to account for the full purchase cost, not just the new home's price. Depending on your circumstances, this may include stamp duty, conveyancing, building and pest inspections, moving expenses and any costs associated with the new loan. Your eventual sale will have costs too, including agent commission, marketing and legal fees.

A borrowing assessment and loan pre-approval may provide an indication of your potential borrowing position and the lender requirements that may apply. Pre-approval is not final loan approval and remains subject to lender requirements, including assessment of the property and any changes to your circumstances.

The main ways to buy before you sell

There is no single structure that suits every move. The most appropriate option depends on your finances, the type of property you are buying and how certain you are about the sale of your current home.

Bridging finance

Bridging finance is a lending option that may be available to eligible borrowers purchasing a new property before their existing property has been sold.

During the bridging period, your lender may combine the existing loan balance and the funds required for the new purchase into a larger temporary debt. Once the existing property is sold, the sale proceeds are generally applied towards the bridging debt in accordance with the loan structure.

Bridging finance may provide a way to fund a new property purchase before the existing property is sold, but it involves additional financial considerations and requires careful planning. Bridging finance generally has a defined bridging period, with the timeframe varying between lenders, products and individual circumstances. Lenders may consider factors such as the expected sale of the existing property, the proposed timeframe and the borrower’s capacity to meet the applicable lending requirements.

Some bridging loans may allow interest to be capitalised during the bridging period, meaning it is added to the loan rather than paid as a regular repayment. Capitalising interest may reduce the requirement to make regular interest payments during the applicable bridging period, depending on the loan structure. However, the capitalised interest increases the outstanding debt.

Accessing equity before you purchase

If you have substantial equity and sufficient income to service the loans, you may be able to release equity from your existing home before purchasing. Subject to lender approval and the loan structure, released equity may be used towards the deposit and eligible purchase costs for the new property.

This may be an option where sufficient usable equity and serviceability are available, subject to lender requirements. However, accessing equity does not remove the need to meet lending requirements for the total debt. It also means your existing property remains exposed to the market until it is sold.

A longer settlement or conditional offer

Sometimes the answer is not a specialised loan at all, but a carefully negotiated contract. You may be able to negotiate a longer settlement period on the property you are buying, giving you time to prepare and sell your current home.

An offer subject to the sale of your existing property may also be possible. A sale-of-property condition may provide contractual protection in certain circumstances if your existing property does not sell, depending on the wording of the contract and applicable law. Your conveyancer or solicitor can explain how contract conditions operate in your state or territory and whether they provide the protection you need.

Understand the risks before committing

Buying before selling may be an option in some circumstances, but it involves financial and timing risks that should be considered before proceeding. The main risk is that your current home takes longer to sell than expected or sells for less than you had allowed for. Market conditions may change between the initial appraisal and the sale campaign, and the eventual sale price or timeframe may differ from expectations.

Avoid basing your plan on the highest possible sale price. Using a more conservative sale estimate may provide a more prudent basis for assessing the proposed purchase and associated borrowing.

Cash flow also deserves close attention. For a period, you may have two sets of loan commitments, council rates, insurance and utility costs. If the property you are leaving becomes vacant, there may be additional maintenance and security considerations. If it becomes an investment property instead of being sold, the loan purpose and lending structure may need to be reviewed.

It is worth considering what you would do if the sale takes longer than planned. Could you meet repayments from savings? Would you reduce the asking price? Is there a fallback option, such as extending settlement if both parties agree? Thinking through these questions early is not pessimistic. It is sensible preparation for a major financial decision.

Prepare a sale plan before making an offer

Consider obtaining property appraisals from local selling agents to understand indicative sale ranges, current buyer demand and recent comparable sales.

You can then align key dates: the expected sale campaign, auction or private-sale timing, settlement period on your current property and settlement date for the home you are purchasing. There may be room to negotiate a settlement that better matches your situation, but no date should be assumed until it is written into the contract.

Where possible, consider allowing for a cash buffer for unexpected repairs, settlement delays, moving expenses and other costs associated with holding or transitioning between properties.

Understand your finance position before making an offer

It may be helpful to discuss the finance implications of buying before selling before you begin serious property negotiations. A mortgage broker may help you understand your potential borrowing position, compare relevant loan structures across a lender panel and explain how different lender policies may apply to your circumstances. Bridging finance policies and eligibility requirements vary between lenders.

At Inspiration Lending, the focus is on understanding your broader property plans as well as the immediate purchase. This may include considering a conservative sale-price estimate, reviewing the proposed repayments during any ownership overlap and helping you understand relevant lender requirements and finance steps before contracts become time-sensitive.

Purchasing your next home before selling your existing property may be an option in some circumstances, but it is important to consider the additional borrowing, expected sale proceeds, holding costs, settlement timing and the possibility that the existing property may take longer to sell or achieve a different sale price than anticipated. Reviewing different scenarios, obtaining appropriate legal advice and understanding the applicable lending requirements may help you make a more informed decision before committing to a purchase.

Disclaimer

General information only and does not constitute credit or legal advice. Your full financial situation and requirements need to be considered prior to any offer and acceptance of a loan product. Lending is subject to lender approval. Contract conditions and settlement arrangements should be discussed with a suitably qualified conveyancer or solicitor.

Inspiration Lending Pty Ltd Credit Representative 569537 is authorised under Australian Credit Licence Number: 389328 | ABN 20687381737.