If your mortgage is costing you more than any of these numbers, according to the rule, you’re over borrowing
I met a number of people pre C19, who all shared a particular dilemma with what they were about to embark on, and that was moving properties. And the problem they had in common was, how do they complete the sale of their existing property with the purchase of a new one?
And the answer is with great difficulty.
It’s certainly possible but not probable. The odds of lining up the sale and purchase on the same date, aren’t in their favour. If they were able to manage it within a month or two of either they’d be doing well, simply because there are so many variables’ they have no control over i.e. does the person buying their property have one to sell, and when do they have to close? Or does the person they’re buying from, have to purchase another property and do they have to complete on a certain date?
There could be a series of purchases that are linked to theirs and this is commonly referred to as a chain and the links in the chain are the people who need to both buy and sell a property.
The difficulty with being caught up in a chain is even the small things can have a huge impact. For example, if one person doesn’t sign a legal or bank document, that could set the purchase or sale back weeks. So, the chain will only progress at the pace of the slowest link which is never good, because you don’t know who they are and what’s delaying them.
And according to a number of studies carried out globally, as many as 3 out of 10 purchases fall through because of issues related to chains i.e. 21% of people had to pull out of a purchase because their own sale had fallen through, 13% said their sale fell through because the purchaser felt it was taking too long.
Chain or not, the conundrum people find themselves in, is should they put their present house up for sale, before they start looking at properties, or should they find one first, and then put it up for sale? Which makes more sense?
Something has to happen first, and my experience is that most people will put their own house up for sale, when they’re really serious about moving.
It’s a tentative for sale sign that goes up outside their property, and very likely, no physical sign goes up at all, it goes up on-line instead, just in case they find nothing suitable or no interest is shown in their property. They do this because they don’t want their family or neighbours to know they were thinking of moving, just in case nothing materialises.
But if there is interest, that creates a problem in itself, particularly if you unexpectedly receive a great offer, and you haven’t found a new property you like yet.
Do you risk leaving the offer behind you, one you may never receive again. Or, on the flip side, if you accept it, are your putting at risk the chances you’ll never see a property you like, and either end up renting for years or settling on a property you don’t like, but you end up buying any way.
It’s a tough one to call. But generally speaking, selling first benefits sellers of homes in a buyers’ market i.e. when it may take longer to sell your property. And buying first typically makes more sense if you’re in a sellers’ market i.e. homes are likely to sell quickly.
So, there are pro’s and con’s, to each strategy and I want to look at each in more detail:
This probably makes most sense, because you have the funds and a budget available, that can be used towards your new purchase. You’re a cash buyer and you’re not a link in any chain, which puts you in a strong position with offers. You can close at any time which makes you very attractive to the seller because they have much more certainty with closing dates, and also your likelihood of following through with the purchase is almost guaranteed. And because of that, they may entertain lower offers from you, than others who have properties to sell.
If you find your dream new home soon after, then great. However, the danger with this strategy is, there could be a significant period of time before you purchase a new property. What happens if nothing comes on the market you like? You could end up renting for years, and you’re seeing that money from the sale of your property reduce at an alarming rate.
Or, if you didn’t have enough equity from the sale of your property, and you needed to borrow monies but you lost your job, or your income is reduced and now you can’t borrow anything or if you can, it’s much less than you need.
You’ve gone from living in a property you owned, to being, a tenant in a property you could be stuck renting in for years to come.
I’m painting a very pessimistic picture but it’s one I’ve seen happen on more than one occasion.
The advantages of buying first, if you can that is, is that you won’t ever have to rent, and you aren’t forced into making a decision about how much you’re prepared to sell your existing property for. If you’re not under pressure, you can hold until you get an offer, you’re happy with, and if the market is particularly poor, you can rent it out for short period of time and generate some rental income.
And buying first, I think would be my preference, particularly if it made sense from a financial perspective. For example, if you had a small mortgage on your first property or none at all, and you had sufficient savings in place to buy a property outright or had enough for the minimum 20% deposit requirement from a borrowing perspective, and your income was sufficient where it could carry two mortgages, then it’s a bit of no brainer. But I suspect not that many people fall under this scenario.
Look, everyone’s situation is going to be different, so there’s really no right or wrong answer when it comes to selling or buying first. You try to do both at the same time. And if you can only do one, you need to really think through what you’re doing, and look at what the best and worst-case scenarios would be if you did. You can then decide if the risk you’re taking on is okay, or too much.
And I would say expect the unexpected. Remember, buyers or sellers aren’t really tied to any sale or purchase until everyone signs on the dotted line and contracts are exchanged, and even at that, it can still fall through.
So, be very logical and methodical, and don’t let emotion get in the way of your decision making. The majority of buyers start off their house hunting quite detached, but then they see something they love, and the heart takes over. Whether this happens or not, always, run the what if scenarios’, and when you write them down, it will quickly become apparent which option is best for you.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at email@example.com or harmonics.ie
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