Buying a new home is one of the most stressful things you can do. Doing it while trying to sell your current home at the same time amplifies the stress – and the risk.
“One of the things I try to encourage my clients not to do is to buy the home of their dreams and then find that they can’t sell their current home,” says financial planner Deborah Kent, owner of Integra Financial Services.
One of Kent’s clients, who was close to retirement, found out the hard way what can go wrong when he bought a new home first – and then had to wait for two years before selling his existing home. “In the meantime, servicing both mortgages was eating into his retirement fund,” Kent says.
What else can go wrong and how can you make selling one home and buying the next as stress-free as possible?
Selling your current home first means you know exactly how much money you have for your next purchase, and you’re less likely to over-spend on the new home when you have an exact budget.
However, buying your next home may take longer than expected and you may be forced to rent for a while. In addition to rental costs, that would mean two moves, double the moving costs and double the packing and unpacking labour. Nevertheless, this is the less risky option, according to Kent.
“You should at least talk to your real estate agent first to get an indication of how easy it will be to sell and to get a sense of the price of your property before you start looking,” she says.
The biggest risk when you buy before selling, as discovered by Kent’s almost-retired client, is not being able to sell your existing home quickly. This leaves you open to unexpected fluctuations in the market.
Kent advises that you prepare your home for sale as soon as you begin considering your next purchase – declutter all rooms and make any minor renovations required, including painting. This will make it more attractive to buyers and help you sell quickly.
Bridging finance versus mortgage portability
Financially, you have two options when selling and buying so you need to carefully research the alternatives before you commit.
Bridging finance allows you to buy your new home before you sell. Lenders generally offer two types of bridging finance: where both properties are combined into one home loan and you have six to 12 months (the bridging period) to sell your current home; or a second home loan that covers the purchase of the new home and is paid off in full once you sell your current home.
Another thing to consider is that bridging finance is generally interest-only repayments, so the principal on your loan will creep upwards the longer you take to sell.
Another option is to take your existing home loan with you to the new home with the help of a mortgage portability feature – to do this, you must sell first or both properties must settle on the same day. If this is possible, mortgage portability can save you money compared to bridging finance because you avoid paying interest on two properties. It can also save you the cost of set-up fees for a new mortgage – not to mention the hassle of having to apply for a new one. When comparing home loans check the loan offers a mortgage portability feature or talk to your lender.
Both bridging finance and mortgage portability can carry fees – as always, it’s important to do your research and compare your options.