Number crunching is one of the less exciting parts of renovating – but unfortunately it’s also one of the most important. Whether you are turning over an investment property or renovating your home as a long-term nest for your family, it makes sense to know you are not overcapitalising and the money you are spending is adding value in the long-term. What’s more, the scope of the work can often determine the best type of finance you need to put in place.
This is the third part in a series about steps to take to ensure the hard work you put into your renovation pays off financially.
So you’ve finished your reno and your house is on the market. But what do you do when you find the next house of your dreams but you have not sold your original one yet?
You have a few options, all of which have their pros and cons.
The first is taking some of the equity out of the home you have on the market to put down a deposit on the home you want to buy.
For example, the house you are selling is worth $500,000. You owe $200,000 and have $300,000 equity, so to procure the home you want to buy you can transfer some of this equity to use as a deposit.
Pros:
- You can secure the house now and either move in or get started on your new reno;
- You’re buying your new home at today’s prices;
- You can shop around for a better loan for your new home as you have a deposit for a completely new transaction and will be able to pay out your existing loan once you’ve sold; and
- You don’t risk losing the house of your dreams.
Cons:
- You’re holding two mortgages which need to be serviced, because in effect, you have borrowed 100% of the cost of the new house on top of the loan you already have;
- You have two houses to maintain; and
- You are sweating on selling!
The second option is a bridging loan. These are useful when you don’t really have enough equity in the house you are selling to make it worthwhile pulling money out of your existing loan for a deposit on the new house.
Bridging finance is no longer as expensive as it used to be and if you have the means to service a bridging loan, most lenders should negotiate with you on a rate that is usually pretty well in line with the current home loan offering.
Pros:
- You can secure the house now and either move in or get started on your next reno;
- You’re buying your new home at today’s prices; and
- You don’t risk losing the house of your dreams.
Cons
- It can be expensive to set up;
- You usually have to stick with the lender you are already with which means you can’t shop around for a better deal;
- You need to service two home loans until you sell your existing home; and
- You are putting yourself under financial pressure which may entice you to sell your home for less than it is actually worth just to ease the stress.
Your third option comes in to play when you simply don’t have the funds to service two loans and you need to sell your place first to free up the money to buy the next one.
But if you really want to secure the house of your dreams, this is when you can start working with your solicitor to put some clauses into the purchase contract that make it possible, but give yourself some breathing space and some outs in case yours does not sell.
There are clauses that can be set up for a delayed exchange on a purchase. This means you’ll pay a small holding deposit initially, but exchange can be subject to either the sale of your home or finance.
Your solicitor could also negotiate a six-month settlement that will allow you to secure the house with a holding deposit, but give you some time to sell yours. This one’s not for the faint-hearted because you are really putting yourself in the pressure cooker to offload your place within the six months.
Again, the pros are:
- You aren’t tied to the lender you are already with because the sale is not linked financially to the purchase. This means you can shop around for a better loan for your new home because you’ve given yourself time to sell your own house and organise finance on the new one;
- You secure the house now and you can either move in or get started on your next reno;
- You’re buying your new home at today’s prices; and
- You don’t risk losing the house of your dreams.
But the cons:
- Sometimes you’ll come up against a seller who is reluctant to give you time to sell, especially if it’s a seller’s market or a hotspot, such as certain suburbs in Sydney; and
- You will lose the house if yours doesn’t sell.
So the short answer to the question is yes; you can buy again before you sell your existing home, and there are number of ways you can make it happen — you just have to decide which best suits your circumstance and will work in your favour financially.
— Paul is the Director of CVG Finance, a leading brokerage offering financial services across all areas.
