How to Buy a House Before Selling Yours
, by Matt Stevens
Generally, when you go about moving house, you’ll accept an offer on your existing property before getting a mortgage in principle and then making an offer for a new home. This means that you’ll know how much your old home will sell for, and therefore gives you an idea how much you can afford to borrow from a mortgage lender.
However, it’s not always possible to paint such a clear financial picture. Whether you’re trying to move in a hurry or it’s just that the property market is rather slow, there are many reasons why you may be prevented from buying a house before you’ve sold your current one.
But just because you can’t complete the transaction in a conventional property chain, this doesn’t go to say that you should rule out the prospect of moving homes. Indeed, there are even some benefits to taking a different approach if your particular circumstances align. In this piece, we’ll show you how to buy a house before selling yours and the specific details that come with doing so.
How to buy a house when you haven’t sold yours
Here are some common strategies to manage the financial and logistical aspects of buying a house when you haven’t sold yours:
Bridging finance: Bridging loans provide temporary funding to bridge the gap between buying your new home and finalising the sale of your current one.
Conditional offers: You could choose to make a contingent offer on a new property, which means the purchase will only proceed once your existing home is sold, usually within an agreed timeframe.
Home equity loan: If you have sufficient equity in your current home, you might consider a home equity loan or a home equity line of credit (HELOC). These options allow you to borrow against your home’s value to fund your next purchase.
What is a bridging loan?
A bridging loan is a short-term loan which literally ‘bridges’ a gap between a debt you are facing and money that you expect to receive in the near future. Essentially, it is a loan which helps you to access the money you need to buy a new property before you’ve sold your old house. They are offered by specialist bridging lenders and are relatively fast loans to arrange.
Bridging loans are only offered on an interest-only basis, and typically have to be paid back within at least 12 months. They are often used by individuals who are either buying a new home before they’ve sold their existing home, buying an unmortgageable property, or purchasing a property at auction and are unable to raise funds quickly enough.
How to get a bridging loan
To get a bridging loan, you’ll first require a substantial deposit as you would with a regular mortgage. As a minimum, you’ll need 25% of your current property’s value, given that the loan-to-value (LTV) ratio caps out at 75%. As well as this, you’ll need a good credit score in order to assure the lender of your loan repayment capability. It’s also important to be aware that bridging loans come with higher interest rates, which can be anywhere from 6-20%, meaning you’ll want to pay it back promptly.
Additionally, your lender will want to know how you’ll pay back the loan exactly, known as your exit strategy. In a moving home context, this refers to the sale of your old property, with it being used as security in case you are unable to make the repayments. On top of this, the lender will also want information such as a valuation so that they can assess the property as security and the strength of the asset, i.e., confirmation that it doesn’t have any significant issues with it which would impact your ability to repay.
Tax implications of buying a house before selling in the UK
Buying another property before selling your old house means that you will technically own two houses for a short period of time. Consequently, there is extra tax on second homes you should know of.
Stamp Duty
Stamp duty is a tax that has to be paid on all properties worth over £125,000, with the total amount increasing with the value of your property. For having two homes, even for a short span of time, you’ll have to pay an additional 5% Stamp Duty. Having said this, if you sell your old property within three years and use your new home as your primary residence, then you’ll be eligible for a refund which you can apply for here.
Capital Gains Tax (CGT)
CGT is a tax you pay on the growth of the value of the property you own. CGT is only paid by those who own two properties, which you will have if you buy a new house before selling your old property. You pay CGT on your initial property when you eventually come to sell it, it represents tax applicable to the value that your old home has increased by since you bought it. In turn, this can considerably reduce the profit you make from the final sale.
Can you put an offer on a house before yours is sold?
Yes, you're free to put down a house offer even before selling your current home. Just ensure that the sellers recognise the sincerity of your offer. On this point, consider informing the estate agent that you're ready to finalise the purchase without relying on the sale of your current home. You can emphasise this by sharing details about your solicitor and bridging loan.
Should I buy before selling?
Pros:
Being able to purchase a new house without depending on the sale of your current one makes you a more attractive prospect to sellers compared to a buyer who needs to wait for a sale.
Not having a buyer in place allows you the luxury of taking your time to find the ideal property or make renovations before moving in, as opposed to feeling rushed into a decision.
Less risk of being gazumped because you don’t have to wait for the completion of various sales.
Cons:
You’ll need to amass enough funds so that you can pay for the new property without selling your existing house.
Owning two homes comes with additional tax implications which can impact your finances.
Buying a second home without selling the first
There are several ways to buy a second home without selling your first, but it demands careful financial planning. Below are the key options to think about:
Remortgaging: If your main residence has increased in value, you may be able to remortgage to buy a second home. This involves replacing your existing mortgage with a new one so that you can release equity to fund your second property.
Taking out a second mortgage: Another approach is to take out a separate mortgage specifically for the new property, while retaining the existing mortgage on your current home.
Equity release for older homeowners: Equity release products for those over 55, like lifetime mortgages, enable you to access a portion of your home’s value as a tax-free cash lump sum without needing to make monthly repayments.
In addition to associated tax implications we’ve already mentioned, it should be noted that if you choose to let out your second property, the rental income will be considered taxable, thereby raising your overall income tax liability.
Speak to an expert mortgage broker
Admittedly, buying a new house before selling yours complicates the mortgage process. Even despite the fact that there are both pros and cons to the decision, if you choose to take this path then it’s advised to have an expert mortgage broker at hand to guide you through the entire procedure.
We at The Mortgage Genie have the experience needed to make buying a new property before selling your old one easy. If you’d like to speak with our mortgage advisors to find out how we can arrange everything for you, then be sure to call 01915809890 today. And why not see how much you could borrow up to right now by using our mortgage calculator?
The above blog has information contained within which was correct at the time of publication but is subject to change.
