Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in bridging loans
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.
How to buy a new property before selling your current home
Buying a property can be an exciting, yet often stressful time. Just when you’ve found a property you love and sold your house circumstances can suddenly change with a buyer pulling out. Or perhaps you’ve spotted a doer upper property at auction, where the full purchase price must be paid within a month and mainstream mortgage lenders won’t provide funds.
In these situations a bridging loan could be the solution. A bridging loan is a short-term loan, typically up to 12 months that is used whilst you are waiting for funding from another source. Interest accrues on a monthly basis and is paid off when the loan is paid off. A bridging loan requires an exit strategy to repay the loan and this is ordinarily selling a property or moving to a longer term loan such as a mortgage.
If you are looking to buy a property and haven’t sold your house, you can still proceed with a purchase by bridging the gap until you sell.
What are the pros and cons of buying before selling?
Taking a bridging loan allows you to buy a property before you sell your own rather than relying on a sale and hoping that timings will align. In some cases if you don’t move quickly you will lose out on a property, or perhaps your sale is taking longer than expected.
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.
Pros
Speed
Moving home before selling your current one removes part of your chain, which can remove some of the stress from the process.
Flexibility
You are able to be more flexible when working towards key dates as you do not have to ensure all parties in a chain align. If you buy a house whilst waiting for yours to sell you can move in when it suits you to do so. Moving days are often stressful, however, having the ability to take some time to move your possessions from one property to another can make a move easier.
Reduce Gazumping Risk
Sealing a deal on a house quickly and proceeding to the binding legal stages of purchase is likely to lower the risk of being gazumped. Gazumping is where an offer is accepted and then another, higher, offer is made by a third party. The ability to move quickly is often seen as a positive to sellers.
Better Deal
When selling your own home you can hold out for a good offer if you are not in a rush, obviously this ultimately has to be balanced with the cost of bridging finance that accrues on a monthly basis.
Cons
Financial Risk
If you’re stretching yourself financially, you’re ultimately taking a risk.
Required to Sell
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.
Is it better to buy first or sell first?
The question of whether to buy or sell first really does depend on your circumstances. If you see a property that you fall in love with and you want to make an offer on it then a bridging loan will allow you to buy first. Alternatively, if you sell your home, and have somewhere to live on a temporary basis, you then have a significant amount of funds and are ready to move quickly with a firm offer when the time is right.
When you have two properties, even if for a short time, additional tax will be incurred and, although refundable, this can add to the fees involved in bridging finance.
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.
Stamp duty
When you buy before selling, you must pay a stamp duty surcharge as you’ll be buying a second property. The surcharge is 5% 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 5% 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 most circumstances. 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.
If things do 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 well below the true value of your property.
A stronger alternative is arranging a ‘rebridge’ that can be used to repay your bridging finance and give you more time to find a suitable buyer. This is effectively arranging a new bridging loan to buy more time. Using bridging loans over a longer period can be expensive as they are short term products.
Finally, if you have enough equity, which is value in your property minus any outstanding loans on it, 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.
Why use a loans broker?
Whilst individuals can apply to bridging loan lenders directly this can be a time consuming, repetitive process and repeated applications can impact your credit file. With a large range of financial products available it is preferable to seek expert advice to find a lender with experience in this area.
Using a specialist loans broker, such as ABC Finance, means that we can negotiate with lenders to find you the best possible deal. Getting a quote is easy, our advisors will call you back for a confidential, friendly no-obligation discussion. If you wish to proceed they will help you fill in a simple form to begin searching for the right lender for you. Initial approval can move quickly and in straightforward cases funding can be made available within a few weeks.
ABC Finance has been supporting individuals and businesses across the UK since 2000 and is regulated by the Financial Conduct Authority. Our experts work with a wide panel of lenders and take time to understand your needs to get you the best deal; our aim is to save you money.
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Learn more about bridging loans
What Are Bridging Loans and How Do They Work?
