Being patient and waiting to find buyers, only to then scramble to find a new place to live, doesn't sound like a fantastic experience. But for many, it's the only option. The alternative - buying a new home before you're forced to sell your current one - is perceived as risky, reckless even. But it shouldn't be. It's a calculated risk, and one you can prepare for.
The chain-free buyer has real power
Property chains can easily break. It is estimated that around 30% of home sales collapse before reaching the finish line, and broken chains are often to blame for these failed transactions. Just one of many reasons for a sale falling through, one weak link in the chain - an anxious buyer, a delayed valuation, a vendor accepting an alternative offer - can undo months of hard work.
But if you've already got your finance in place for your next purchase, you won't have a chain. Suddenly you are in a very different position. Chain-free sellers are in eager demand. As a rule of thumb, in virtually every competitive market, property sellers with no chain will always choose them over other bidders, including those whose money is subject to the sale of their own home. It is likely to be you that wins the concession of a bit more off the asking price, or you that secures the completion date that works best for you, if you're in a position to go through with the purchase right away.
In the worst cases, offers that are dependent on the successful sale of the buyer's home elsewhere are simply not considered. Sellers in many markets are tired of waiting weeks only to find out that their buyer has been messing them around and has ultimately withdrawn their interest.
Unlocking equity without waiting for a sale
The main obstacle is financial. If you're planning on buying another property, your deposit is typically tied up in the equity on your current home. Naturally, you can't free up that equity until the sale is finalized - unless you seek a short-term loan specifically created for this type of scenario.
A bridging loan essentially leverages your current property to make more equity available. This gives you the needed deposit to purchase the new home before the existing one is sold. This is how it works: You apply for a loan based on the value of your current property in addition to the details of your new mortgage. There are two types; closed-bridge, where a date for a repayment is agreed upon after a contract exchange, and an open-bridge, which doesn't have an official payback date; however, it tends to have a shorter term. The closed-bridge will have a lower interest rate since it's clear when the loan will be repaid.
Another alternative is let-to-buy. You have the option of refinancing your current property onto a buy-to-let mortgage. The benefit here is that equity is released, separating the rental side from the selling side. This is a great option if you are okay with having a rental property; however, if you aren't, then comparing bridging finance options is the right choice for you.
The real cost of temporary dual ownership
It's not free. Before you decide if that's the right approach for you, run the actual numbers.
You'll have two insurances. Two sets of utility standing charges. And in many markets, you'll pay the higher property transfer tax rate on the second purchase you complete while you still own the first. That's often reclaimable once the first property sells, but you need to have the cash to pay it in the first place. And for most lenders, you need to declare it as a cost of the second transaction and have resources outside of your deposit to cover it. That means it's a real, additional cost, not a bookkeeping transaction.
You'll pay a slightly higher rate for a bridging loan (which assumes the time a standard sale will take), rather than a mortgage. Most are calculated monthly rather than annually. With the vast majority of that cost upfront. Rates are slightly higher at low LVR and higher at higher LVR - there's no LVR at which you pay less than with a standard mortgage. These costs are in practice for most buyers not much higher than rental costs for the same period - and there are no agent fees for a second rental in six months, no costs of double moving, no potential gap between vacating one and being able to move into the new home, and no storage costs for your furniture in the interim.
Structuring an exit strategy that lenders will accept
No lender is going to lend you transitional finance without a realistic exit strategy. This isn't a formality - it's the core of their underwriting decision.
If you are applying to buy before you sell, your primary exit strategy is the sale of your current property. A lender will want to know what current evidence in the market will support your estimated listing price, and they will want to know exactly what you plan to do to sell your home, including exact locations, dates, and costs.
Get an independent valuation before you approach a lender. Agree on a realistic price with your agent. Know what you'll do if the first asking price doesn't get offers within a set period. Lenders see plenty of applications where the borrower has already found the next home but hasn't thought seriously about how to move the current one quickly. That hesitation shows in the application.
Buying before selling works. The buyers who do it well have done the math, secured the right structure, and treated the sale of their current home with the same urgency as the purchase of their next one.
