Buying your first house is quite a linear process, you get pre-approval, you buy a house. When it comes time to sell your home and buy a new one, the journey is more of a pick-a-path. It’s like a Goosebumps book – only more exciting as at the end you have a new house rather than a paperback you’re probably not going to read again. In this article, we take you through the process. Read on… if you dare…
So you’ve found the house of your dreams but haven’t yet sold your current home. What next? There are a couple of options:
This option means you aren’t taking on the risk or extra cost of a bridging loan. However, it does make your offer a lot less attractive to the seller as they are reliant on you selling your previous home in order to go unconditional on their own home. In a hot market, it could be hard to get your offer accepted and this strategy doesn’t work if the house you are buying is being sold by auction (as all sales at auction are unconditional).
Getting pre-approved for a bridging loan is almost the same process as a usual pre-approval where the lender will need to approve any properties before you put an offer on. The deposit is usually taken from equity from the current property but can also be made up of cash if you have some. The aim is to sell your current home as soon as possible to minimise the cost of a bridging loan.
Lenders can provide you with bridging finance to allow you to purchase your new home before selling your existing one. During the period of the bridging loan you are paying interest on both your original mortgage and your bridging loan. That alone can be reasonably costly and sometimes you’ll be outside the main bank criteria meaning you’ll be paying a higher interest rate. But bridging lending gives you the flexibility to buy the house you want, not just the house that was available within a tight timeframe.
Closed bridge loans have a lower risk for the banks so are easier to get than open bridge loans. Having said that, non-bank lenders are more flexible and often are able to provide a solution when the banks can’t.
Open bridging finance works well if the property you’re selling has attractive qualities and is likely to get lots of interest. If your house has red flags – such as plaster cladding or a leasehold title – it is likely to be on the market longer than other houses in your area. The resulting large interest payments over a long period would need to be taken into consideration and planned for.
When it comes to the additional costs of bridging, try not to think of them as painful expenses. Rather think of them as a cost of doing business. Let’s say you’re buying a home for $1.2m and the bridging loan is going to cost you an additional $20k. Would you have paid $1.22m for the new home? If so, think of it that way. The cost of your new home is just the purchase price plus the additional cost of bridging.
This path is nice and simple. Once you’ve sold your home you’ll know exactly how much of a deposit you have and your mortgage broker will be able to progress your pre-approval. For some good info on selling your house we recommend the settled.govt.nz website
You’ll remember from buying your first home that the pre-approval is a promise from a bank/finance company to lend you up to a maximum amount of money. The offer expires after 2-3 months, usually with the option to renew for a total period of 6 months before requiring a full new application.
As a reminder, getting pre-approval comes down to:
For those that like to be super organised, check out our article on Preparing for Your Mortgage: Documentation. You will be required to produce this documentation even if you’re going for pre-approval with the bank who held your previous mortgage. They need to ensure they are using the most up to date information when making decisions on a new mortgage.
You’ve been here and done this already, but when you go to buy your next home your circumstances and budget are often different than when you were last in the market. Take the time to recalibrate for your current circumstances.
Articles that may be of interest when determining your parameters:
You remember your old friend Due Diligence? Quick reminder, this often means:
With the advice of your lawyer and mortgage broker you will decide whether you are making a conditional or unconditional offer.
If you are making an unconditional offer you will need to work with your broker to get the property approved by the bank before you submit your offer. Note that all bids at auction are unconditional.
Check out these articles on the main types of property sales:
Yay, you did it - again! You know the drill; if your offer was unconditional or purchased by auction, now is the time you pay the deposit. It’s usually 10% and is non-refundable, no takesies backsies. If your offer still had conditions, you’ll need to work with the relevant parties to meet the conditions within the agreed timeframe. Once conditions are met it’s time to hand over that deposit.
It’s probably been a while since you’ve done this; we’ll refresh your memory of how everything goes once you’ve gone unconditional.
Two weeks out:
One week out:
Two days out:
After settlement day:
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