What Happens When You Go to Buy Your Next House?

Date Published: 30 June 2021

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…

Pick-a-path: Buy your new house then sell your old place

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:

Make an offer “conditional on selling”

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).

Make an offer with a pre-approved bridging loan 

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.

There are two types of bridging loans:

• Open bridge – allows you to purchase a new house with no specific date for when you’ll sell your old house. Generally, these loans specify that you need to sell your old house within 12 months.
• Closed bridge – this is a bridging loan with a specific sell date for your current home. Usually, you would already have an unconditional offer in place for your current home. Great for when there is overlap between the settlement of your old property and settlement of your new one.

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.

Pick-a-path: sell your current home then buy your new house

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:

• Proof of deposit. Usually, a 20% minimum deposit is best.
  • Can I Take Out a Loan to Increase My Deposit? (TLDR: No, you can’t).
• Proof of income. 
  • Note that any debt will be taken into account when the bank calculates your income.

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.

House buying tips

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:

• Should l Purchase a New Build or an Existing House?
• Apartments – The Low-Down on High Rises
• Mortgagee Sales – What to Look Out for

You remember your old friend Due Diligence? Quick reminder, this often means:

• Ordering a LIM and/or building report and checking the property title.
• Reviewing the drafted sale and purchase.
• Getting your lawyer to look over all the documentation.

With the advice of your lawyer and mortgage broker you will decide whether you are making a conditional or unconditional offer. 

Common conditions:

• Confirmation of finance.
• Satisfactory LIM and/or builder’s report.
• Confirmation that insurance cover is available for the property.
• Completion of remedial work by seller.

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:

• Auctions – A Step by Step Guide
• 4 Tips on Making an Offer by Tender
• What is Price by Negotiation?

When your offer is accepted

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.

The settlement process

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.

First steps:

• Provide your lawyer with your IRD number and a copy of your licence or passport.
• Organise home and contents insurance. This is also a good time to review your life and health insurance to make sure your cover is still fit for purpose.

Two weeks out:

• Meet with your mortgage broker to determine your new mortgage structure and interest rates. You’re an old hand at this by now but it’s a good time to review how you are managing your finances.
  • 3 Questions to Ask Before Fixing Your Mortgage
  • Weekly Mortgage Payments vs Monthly Payments
  • Revolving Credit vs Floating Mortgage
  • What is an Offset Account?

One week out:

• Arrange with your lawyer to sign the loan documentation.
• The bank will contact you to arrange accounts.

Two days out:

• Complete a pre-settlement inspection of property.
• Transfer any cash contribution towards purchase to your lawyer.

Settlement day:

• Your lawyer will notify you once they have confirmation from the seller’s lawyer that the money has arrived in their account. The real estate agent will then arrange to hand over the keys.

After settlement day:

• Check that your mortgage account is set up as expected. If not, let your mortgage broker know. 
• Then it’s business as usual, with your broker always there to help you:
  • Refix your rates when the time comes.
  • Restructure your mortgage as your circumstances change over time. 
  • Apply for a top up, e.g. for renovations 
  • Buy your next house or investment property.

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