If you’re considering purchasing property but already own an existing property, one of the most common questions you’ll face is whether to sell the existing property first or hold on to it.
There are a lot of factors that come into play when making this decision, such as your age and your financial goals. So, before you sign on the dotted line, it’s worth the advantages and disadvantages of both scenarios, and why the reason you’re purchasing a new property plays a deciding factor.
Why Australians may choose to purchase a new property
Whether you’re a long-time investor, or an owner-occupier looking to upgrade, the purpose behind the purchase may guide you into deciding whether to sell before buying. This includes:
1. Your family is growing.
One of the simplest reasons Aussies may decide to purchase another property is that they’ve outgrown their existing property. If the existing property has increased in value, selling this before purchasing the next property may give you a larger pool of funds to work with. However, you may choose to use the income earned from renting out an existing property as additional income for your growing family.
2. You’re nearing retirement age.
If you’re entering this phase of life, you may be taking stock of your existing assets to work out how much of an income you’ll earn. This can impact your decision to sell before buying in two ways: you need the passive income earned from renting out your current property, or you’re considering if this passive income may impact the income you’d otherwise be eligible for from the Age Pension.
3. Your financial situation has changed.
Whether you’ve gained a promotion or you’ve fallen into hard financial times, a change in your financial situation may impact your decision to sell before buying. In one scenario, an improved financial situation may lead an individual to upscale. Alternatively, an individual may need to downgrade their property and use the funds earned from the sale of an existing dwelling to pay off debts.
What to consider about selling a property before buying your next
The most significant benefit of selling a property beforehand is that it allows you to know exactly how much capital you have to work with for the next purchase. You may be able to use these funds for a generous deposit on a new property, or pay for a dwelling outright. This can help reduce your ongoing expenses, particularly if the property is paid in full.
If you intend to keep multiple properties, there are additional expenses to juggle. This may include multiple mortgage repayments with different interest rates and fees, multiple council and water rates, and multiple ongoing repair and maintenance costs. Selling in this scenario may work out to be more affordable long-term.
However, if property prices in the interim period between selling and buying were to increase, you may find that your new funds do not take you as far as you expected. Or, if you’re considering a new home loan and interest rates were to increase in this period, you may find that servicing a loan is now harder.
Also, the added advantage of keeping a property for investment purposes is the passive income this may generate. The money earned from rental payments, minus any expenses, may be used to pay off a new mortgage or to bolster your income.
How can I pay for a new property if I don’t have funds from the sale of my existing property yet?
If you were to sell an existing property before buying an additional one, another common conundrum is what to do if you find your ideal property, but you’re still finalising the sale of your old property. It’s not uncommon for cash flow and timing issues to occur.
This is where a bridging loan may come in handy. It is a short-term financing option in which a lender provides the buyer with the funds needed to purchase their next property. A lender will assess the outstanding balance of an existing mortgage (if present) as well as the purchase price of the next property, including any upfront costs and fees, to calculate how much you may be eligible to borrow. This is also called your ‘peak debt’.
After the existing property is sold, you may put the proceeds towards the ‘peak debt’. If there is debt remaining from the bridging loan (also known as ‘end debt’, it may then be ingested by the new mortgage for the new property.
Typically, borrowers will be offered one of two types of bridging loans: open bridging finance and closed bridging finance. Open bridging finance is for property owners looking to sell but have not yet found buyers. It is typically available for a 12-month period, and the seller will need to demonstrate evidence they are actively looking for a buyer. Whereas closed bridging finance may suit those who have found buyers, but are still finalising the sale, waiting on paperwork or settlement, and need funds to purchase another property ASAP.
Whichever option you choose, it’s essential that you do your research and make sure it aligns with your personal financial goals. Consider both sides of the argument against your own situation, such as if you’re nearing retirement or have a growing family, before making a decision.
If you’re struggling to decide, it may be worth seeking advice from a mortgage expert. Reduce Home Loans’ team of experts are here to help you find the right home loan for your needs. Get in contact today on 1300 733 823.