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Buying and selling at the same time can be a tricky thing to pull off. You'll want to reduce any time you spend in rented accomodation and make sure you get a good offer on your current home. Here we discuss the different avenues you can do down as well as the pros and cons of each.
A bridging loan is a short term loan that covers the gap between buying a new home and selling your current home. Typically you will pay interest only over the bridging period.
The term of a bridging loan is typically 6-12 months. After settlement, repayments will change to standard principal and interest. Your current home loan should be paid off from the sale of your property.
Bridging loans are often preferred because they can save you the trouble of renting after selling your current property by allowing you to purchase another home straight away.
During the bridging period, some lenders may charge higher interest rates while others may only require you to pay the mortgage repayments for your current home loan.
Since bridging loans are interest only over the bridging period, the longer it takes to sell your property, the more interest you’ll gather. You may also be charged a higher interest rate if your property doesn’t sell within the bridging period.
If your current lender doesn’t offer bridging loans, then you may have to consider changing lenders and potentially pay exit fees. You may also be charged valuation fees for both properties if your lender requires them both be valued. Some lenders may also require that you hold a certain amount of equity (usually 60% of the purchase price) in order to qualify for a bridging loan.
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Another option is to attempt to have a simultaneous settlement. This is when the settlement of your current home happens on the same date as the purchase of your new home. While a simultaneous settlement can be convenient by preventing you from having to rent, it is difficult to coordinate and there are a number of risks involved.
Firstly, if the settlement date is delayed, you risk paying penalty interest and you could even lose the deposit on your new home depending on how long the settlement is delayed for.
You may be able to negotiate that the settlement date to occur within 6 months after the sale contract is entered into. However, if you don’t find a property in time then you may still have to rent or risk losing your deposit.
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A deposit bond guarantee is another option available often used by borrowers upgrading or upsizing their homes.
A deposit bond guarantee is a guarantee of a deposit by your lender instead of a cash deposit on the property you would like to buy. This is a way to secure another property without accessing your savings.
This allows you to secure the property even if you haven’t sold your current property yet. This also gives you time to to gather the funds required by delaying the payment of the deposit until settlement. And, it can be cheaper than a bridging loan.
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One option you can consider is selling your current property before buying a new one.
The benefits: This option may be preferable because you are not rushed to sell and can sell your property at the price that you want. You will also know exactly how much you can spend on the next property.
Selling first can mean that you have a deposit ready to go for the next property. You also may not have to worry about not being able to find another property before the settlement date. If you have found another property, then you can try to have the settlement date extended to when the house you sell is settled.
Selling first may also be a good option if your house does not have much equity (if you owe over 80% of the property’s value) because you won’t be eligible for a bridging loan. This will also save you from the expenses of taking out a bridging loan.
The risks: The biggest disadvantage you face is not having another property to purchase straight after you sell. You may then have to rent, which can be an extra expense, or move in with a family member.
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Your other option is buying your new property first and then selling your current one. In this situation, the lender takes control of both properties and your repayments would cover your total debt. Once your property is sold, your repayments and debt are reduced.
The benefits: The biggest advantage of buying first is that you are able to avoid renting while property shopping. You can also take your time when looking for a new home.
The risks: However, your property needs to have significant equity (60% or more of the property’s value) and you need to be in a financial position to afford the increased repayments, otherwise your lender may decline your application. Your spending budget for your new property may also be uncertain because you haven't sold your other property yet.
You may also risk your current property taking longer than expected to sell. This could mean that you would have to sell your current property at a lower price than you would like or below the market value in order to meet the settlement date for the new property. Buying first also means that you may risk having to take out a bridging loan.
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