So you’re ready to put an offer down on a new home. But there’s a snag. It doesn’t look like you’ll be able to sell your existing property as part of the same property chain. This could be for a few reasons. Maybe you need to relocate quickly, or the property market is a little slow right now. So what do you do?
To help, we’ve put together a practical guide on how to buy a house before selling yours.
Buying first or selling first – the pros and cons
Usually, when moving home, you’ll accept an offer on your current property, arrange a mortgage in principle to find out how much you can borrow from a lender, then make an offer on the property you want to buy.
This links multiple properties together in a chain, meaning each relies on the others completing within a similar time frame so that everyone’s purchase can move forward smoothly.
There are some benefits to skipping this process and buying before selling or selling before buying. Both options also come with added risk, though.
Should I buy before selling?
- You’ll be an attractive buyer: if you can afford to buy a new home without relying on the sale of your existing one, you’ll be more appealing to sellers than a buyer that has to wait to sell.
- Less pressure: You can take your time to find the perfect property rather than rushing because you have a buyer.
- Reduced risk of gazumping: gazumping is when a seller gets an offer that’s higher than one they’ve already accepted, and then rejects that original offer. The less time you have to wait for various sales to complete, the lower the risk of this happening to you.
- You need to be able to afford it: You’ll need to find a way to pay for the new property without selling your current home.
- Stamp Duty and Capital Gains Tax: Owning two properties at once (even for a short time) comes with added costs.
Should I sell before buying?
- You’re an attractive buyer: Sellers love buyers who don’t have to sell an existing property to get the purchase moving.
- You know your budget: If you’ve sold your old home, you know how much you can afford to pay for a new one.
- Added rental costs: Staying in rental or other accommodation between homes can add up.
- Not sure how much to sell for: If you haven’t found a new property yet, you might not know how much to accept when selling your existing one.
How to fund a house purchase without selling your home: use a “bridging loan”
What is a bridging loan?
A bridging loan is a short-term, interest-only loan that’s supposed to ‘bridge’ a gap between a debt you’re facing and money you’re expecting to become available at a later date.
People often use bridging loans when:
- Buying a new home before selling an existing one.
- Buying a property that’s unmortgageable. They might plan to redevelop it and get a traditional mortgage later.
- Buying a property at auction when they’re unable to raise funds quickly in another way.
These loans can be faster to arrange than mortgages and can have more flexible terms. This is because you only borrow the money for a short time and can’t access it without proof that you’ll be able to pay it back. They’re usually offered by specialist bridging lenders who are well aware of the need to move quickly.
Bridging loan costs
Depending on how much equity you have available, you can usually borrow between £50,000 and £10 million with a bridging loan. You’ll need to put down a deposit in the same way you would for an ordinary mortgage. The loan-to-value ratio (how much of the property you own compared to how much your lender has lent to you) tends to max out at 75%, so you’ll need a deposit of 25% minimum.
Keep in mind that bridging loans have a higher interest rate than other types of loans. This is because you only borrow the money for a short time. The exact rate will depend on the lender, but you could pay anywhere from 6% to 20%.
You can get a bridging loan for anywhere from three to eighteen months. Some lenders will charge an exit fee, but most tend not to.
How to get a bridging loan
While these loans can be arranged more quickly than a traditional mortgage, lenders will still have strict criteria. To get a bridging loan, you’ll need:
- Good credit: because you’ll have to pay the bridging loan back so quickly, your lender will want you to have an excellent credit rating. (Your income doesn’t matter as much here, unlike a mortgage.)
- Asset strength: like with an actual mortgage, the lender will want to check that the property you’re buying doesn’t have any significant problems. If you’re planning to redevelop a property, your lender will want proof that you can afford to carry out the work, can weather any setbacks, and that the property will sell for enough money in the end.
- Exit strategy: a plan for how you’re going to repay the bridging loan. This would be the sale of the property you’re waiting to sell (in other situations, it might be the development and sale of the property you’re buying, or a remortgage).
What are the tax implications of buying before selling?
If you buy another property before selling your old home, you technically own two properties, even for a short time. This means you’ll have to pay extra tax when buying and selling.
Stamp Duty Land Tax
You have to pay a tax called stamp duty on all properties worth over £125,000. The amount you need to pay goes up in line with the value of your property. If you buy your new home before selling your old one, you’re technically buying a second home, which means you’ll need to pay an additional 3% stamp duty. (These figures are for England and Northern Ireland – see rates for Scotland and Wales here.)
But luckily, if you sell your old property within three years and use your new property as your primary residence, you’ll be able to apply for a refund of that extra 3% tax. You’ll need to claim your refund within three months of the sale of your old home or within twelve months of filing your Stamp Duty Land Tax tax return, whichever comes later. Your solicitor will likely have filed this on your behalf when you bought your new property.
Capital Gains Tax
CGT is a tax you pay on the value that your property gains while you own it. You only need to pay it if you own two properties. So technically, if you buy a new property before selling your old one, you’ll need to pay CGT on your first property when you eventually sell it – and this can seriously reduce the profit you make from the sale.
Can you buy a house before selling yours in Scotland?
Buying a house in Scotland is slightly different from the rest of the UK. Chains aren’t that common in Scotland because you can’t make an offer on a property if you don’t have the funding ready to complete the purchase. This won’t happen if your new mortgage deposit is tied up in a house you haven’t managed to sell yet.
Overall, it’s much easier to buy a new home in Scotland after selling your old one. But you can still access bridging loans if you want to buy before selling.
Quick summary: buying a house before selling yours
It is possible to buy a new house before selling your old one. You might need to do this if you have to move home quickly or if the market is slow.
Bridging loans can give you the funding you need to buy a new home for a short time, allowing you to pay them off when you sell your old home.
However, you’ll have to pay more tax when buying first and selling later because, for a short time at least, you’ll technically own two properties.
Buying a new home before selling your old one can be rather complicated. Habito can walk you through the process, providing you with an expert to answer any fiddly questions you might have about funding, tax and more.
Check out Habito’s complete home-buying service here.