Is it possible to buy a property before selling your own?
Yes, buying before selling is certainly possible, although it obviously creates a serious financial burden. Most people don’t have the cash lying around for two properties and can’t fund this type of transaction without the need for additional debt.
Equally, most people won’t have the income required to qualify for, and then keep up repayments on two mortgages while waiting for their property to sell.
The good news is that while mortgage lenders may not be willing to help, there are other options. We’ll cover these later in the article – keep reading to find out more.
What are the pros and cons of buying before selling?
There are a number of pros and cons to consider, however committing to a property purchase before selling is usually borne out of necessity, rather than choice.
- Moving home before selling your current one removes part of your chain, which can remove some of the stress from the process.
- When not trying to tie in completion dates with both your buyer and seller, you’re able to be more flexible when working towards key dates.
- If you’re stretching yourself financially, you’re ultimately taking a risk.
- Should you struggle to sell your property in a reasonable timescale, you may be forced to accept an undesirable offer if the funds are needed elsewhere.
What are the key considerations?
The financial burden
If you have the funds to purchase both properties without stretching yourself financially, then you’re in a fortunate position and can afford to proceed.
If you aren’t so lucky, then serious consideration of the financial impacts must be made. This is especially true when you’ll be borrowing some, or all of the funds needed to complete the transaction.
It’s important that you calculate the financials based on a number of outcomes, including delays to your sale, market changes and the impact that these things would have on your finances.
When you buy before selling, you must pay a stamp duty surcharge as you’ll be buying a second property. The surcharge is 3% of your purchase price. The surcharge is paid in addition to the usual Stamp Duty rates.
Should you sell your current property within 36 months of buying the new one, you can apply for a refund of the additional 3% from HMRC.
While most properties will sell within 36 months, you will still have to pay the funds out upfront.
How quickly will your current property sell?
A data driven approach should be taken here, rather than relying on the sales pitch of a local estate agent. There are several tools that provide a breakdown of property sales in each area, with home.co.uk providing plenty of useful info for free.
While average sales data for your area isn’t a guarantee of what will happen, it does provide a good guide to demand.
Financing a purchase before selling
As with the rest of this article, it’s assumed that you don’t have the funds to purchase the new property from money held in savings. Here, we’ll break down the options available when looking to finance this type of transaction:
Talk to your current mortgage lender
In some circumstances, your lender may be able to offer a second mortgage while waiting for your property to sell. This is usually only an option where affordability (your income compared to your borrowings) is extremely comfortable.
Where this is possible, it will usually be the cheapest way to proceed – although it does mean you’ll have two monthly mortgage payments to make.
Use a bridging loan
A bridging loan is the most common product used to fund these transactions. They are a type of short-term loan that often have no monthly payments to make, as the interest is added to the loan and repaid when the property is sold.
Care must be taken when using these loans as when borrowing against your own home, you must take a regulated bridging loan, meaning you can only borrow for a maximum of 12 months. In addition, bridging loan costs tend to be higher than those associated with traditional mortgages.
What are my options if it goes wrong?
Plan for the best and prepare for the worst – this is the only way to handle any sort of property-based transaction.
While your options do narrow should things not go according to plan, there are still options available to you.
The first is fast house buying companies – they offer a guaranteed way of selling your property should you need to. The downside, of course, is that the offers they make tend to be below your properties true value.
A stronger alternative is rebridging loans, which can be used to repay your bridging finance and give you more time to find a suitable buyer.
Finally, if you have enough equity, you may consider refinancing the property to a buy to let mortgage. This will allow you to rent out the property while waiting for market conditions to improve. It’s worth noting that should you let the property, you have to consider the impact of losing your Stamp Duty surcharge rebate, as this could cut into your profits.