How to buy a house before selling yours
Slow market? Here's everything you need to know about buying before selling
Last updated on
May 16, 2022 14:32
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.
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.
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:
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.
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.
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:
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.
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.
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.
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.
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.
How much does it cost to hire a solicitor when buying a house? Fees vary, and here’s a breakdown of what you get for your money.
Habito specialises in helping you get the best mortgage or remortgage, all online, for free