What comes first: buying a new house or selling yours first? Just like the chicken or the egg, it’s a question people have been pondering for a long time, and especially with the market fluctuating and uncertainties surrounding house prices, it’s not unfair to want to know the best way to behave when it comes to finding a new property.
Or perhaps you’ve already put down an offer on a new home, but it’s not looking like you’ll be able to sell the property you’re currently living in in-time; either because you’re trying to move or relocate quickly, or because the property market is slow right now. Luckily for you, we’ve put together a guide on how you can buy a house before selling yours!
Understanding a house chain
To answer this question, we need to understand the advantages and disadvantages for both sides. The typical process when looking to move house is to accept an offer on the property you currently own, so that you can arrange an agreement in principle (AIP) to discover how much you could borrow from a prospective mortgage lender, and then make an offer on a property.
This is what’s known in the property and mortgage world as a ‘chain’; each party relies on the other completing at the same time (or within a similar time frame) so that everyone’s purchase can move forward smoothly.
If you’re looking to buy a house before selling yours, you’ll skip this process entirely, which can come with some benefits, but also some risks.
The benefits of buying a house before selling yours:
There are a few key benefits to buying a house before you sell yours, including:
- You may be more attractive to prospective buyers: If you have the expendable income to afford to buy a property without relying on selling your existing one, you could be more attractive to potential sellers than those who need to wait to sell their house before they can complete.
- You can avoid getting into a chain: A press release from Rightmove in 2021 discovered that the number of buyers searching for properties with “no chain” had increased by 72% over 12 months. When you’re in a position to buy a house before you sell, buyers know they can essentially buy your property and move straight in, without worrying about you needing to find a property.
- You’re under less pressure to find a property as you’re not rushing to meet the timescale put in place by your buyer, meaning you can take the time to find the perfect property.
- You’re at less risk of gazumping; although it sounds like a word from a Dr Suess book, gazumping is when the buyer is offered a higher amount from someone else, and accepts it even if they may have verbally agreed to accept yours. When you reduce the time you have to complete the sale, this is less likely to occur, and you may be less likely to miss out on the property you love as you can move quickly.
The risks of buying a house before selling yours:
But with benefits, come risks, and the risks involved are:
- The cost: Finding the money to buy a property without using any equity from your existing property can be tricky, if not impossible. You may also not have a clear idea of how much you can afford to spend if you haven’t agreed on a price for the property you currently own.
- Owning multiple properties can lead to increased costs regarding Stamp Duty and Capital Gains Tax.
- Getting a mortgage: If you still have a mortgage on the property you’re waiting to sell, it may be more difficult (or even impossible) to obtain a mortgage for the home you’re hoping to buy.
Can I put an offer on a house before selling mine?
While there are no objections legally to putting an offer in on a house before selling yours, most estate agents would advise against it due to the risks involved. Although you may view it as an opportunity to get into your dream home as quickly as possible, with every intention of selling your own property before your offer is accepted, talks of exchanges are on the cards.
But even with all those good intentions, if your property doesn’t have a sale agreed upon, you may end up losing your dream property due to not being able to close on the deal as you never found a buyer for your house. As you’ve not yet sold your existing property (or have any deals in discussion) you won’t be able to give the seller any idea of when you may be able to move forward with the purchase, as you won’t know how long it will take to sell your property.
What are the tax implications of buying a house before selling?
When you own more than one property, you’ll be expected to pay more tax when buying and selling your property; the taxes you need to be aware of are Capital Gains Tax and Stamp Duty Tax. Let’s explore how these will be affected and how much you could be expected to pay if you’re buying a house before selling yours:
Capital Gains Tax
Capital Gains Tax (CGT) is a type of tax you’ll be expected to pay on any value increases your property gets while you own it. The rate you’ll pay will depend on your tax band, with it set at 28% for higher-rate taxpayers and dropping to 18% for basic-rate taxpayers. You’ll pay CGT when you sell your second house, meaning you may not make as much back as you’re expecting.
Stamp Duty Tax
On all properties valued at more than £125,000, you’ll pay a tax called Stamp Duty. If you own a second home (which you will if you buy a house before you sell yours) you’ll pay an extra 3% Stamp Duty, but if you sell your second property within 3 years, you’ll be eligible for a refund of this charge.
This refund must be applied for within 3 months of the sale of your second home, or within 12 months of filing your Stamp Duty land Tax return (You can check with the solicitor for this paperwork as they will likely have filed it on your behalf!)
How to buy a house before selling yours:
One of the most common ways to buy a house before yours has sold is through a bridging loan. A bridging loan offered on a short term, specifically to ‘bridge’ the gap between an existing debt (purchasing a house) and the money you’re waiting for (funds from the sale of your existing house)
Bridging loans are perfect for those:
- Purchasing a new property before selling their existing one
- Purchasing a property that’s unmortgageable
- Purchasing a property at auction who aren’t able to raise the required funds quickly
Bridging loans can be arranged faster than mortgages, and usually have more flexible terms due to the short length of time you’re borrowing the money, and the fact you’re not able to access the money without providing proof you’ll be able to pay it back (for example, plans of putting your house on the market).
But how much can a bridging loan cost?
How much you’re able to borrow will depend on how much equity you can put down, but typically you’ll be able to borrow between £50,000 to £10 million. Just as you would with a mortgage, you’d need to put a deposit down, and the LTV (loan-to-value ratio) won’t typically be above 75%, meaning you’ll need a minimum deposit of 25%, and could be expected to pay anywhere from 6% to 20% interest on what you borrowed.
It’s not impossible to buy a property before you’ve sold your existing one, especially if you’re looking for a quick move, or if the market is slow, however, you need to be 100% sure you have the funds to secure the deal, whether that’s in cash or through other means like a bridging loan. And don’t forget about those extra tax implications when working out your budget!
We know how complicated buying a house or moving homes can be. Our experts can talk you through every step of the way; our goal is to make mortgages easy. Get in touch with our team today or read more helpful tips and insights.