Buying a new property and selling your old one can be an expensive and tricky process. One of the key things to consider is the timing. Should you buy your new place before selling your current property? Or should you sell your property first before buying a new one?
An option that solves that dilemma is simultaneous settlement. This article will tell you everything you need to know about simultaneous settlement: advantages and disadvantages, the simultaneous settlement timeline, frequently-asked questions, and more. Find out if simultaneous settlement is for you.
It’s a complicated exercise, but Sydney borrowers can make an appointment to chat to an experienced conveyancer I work with and recommend, Yasemin from Rubistone Conveyancing
What is simultaneous settlement?
Settlement is the final process in the transfer of property ownership. It usually occurs some weeks or months after the exchange of contracts for sale and the paying of a deposit. It is when you pay the balance of the asking price and get the keys to your new property.
Simultaneous settlement means you settle on the place you are buying and the property you are selling at the same time.
Buy or sell first vs. simultaneous settlement
Buying first
If you buy your new property before selling your current place, you are the owner of two properties at the same time and may have to cover two home loans for a short period. You will have a mortgage on your new property which you will need to start paying, while maintaining payments on your current mortgage.
Depending on how long this goes on, it could be an expensive exercise. It may make you feel under pressure to sell your current home quickly, possibly for less than you hoped for, so that you can pay for your new property purchase.
Selling first
If you sell your existing property before buying a new home you will have to work out where you’re going to live in the meantime. This may mean renting until you buy, or maybe staying with friends or family.
There is the possibility though, that you can stay in your current home for a while.
Under a “lease-back” agreement with the buyer of your home, you agree to pay rent to the new owner while staying in your place for an agreed period of time. You may have to accept a lower selling price as an incentive to the buyer to accept this arrangement.
Simultaneous settlement
Simultaneous settlement removes these problems of timing and could save you money. If everything goes according to plan, you settle on your new property at the same time as you finalise the sale of your old one.
The funds from the sale of your existing property will go towards paying off your mortgage, while any monies left over will reduce the mortgage on your new property.
The timeline
– Decide if you want to offer your property for sale first, or buy the new property first.
– It is recommended you engage a lawyer or conveyancer to help you with the settlement process, since it can be complicated.
– Arrange for an extended settlement period, if possible, on either the sale or the purchase. For example, if you buy a new place first, you arrange an extended settlement period to allow you more time to sell your property. But if you sell your existing home first, you’ll need to negotiate for more time to find a new home before you can settle.
– Arrange for the mortgage on your existing property to be discharged.
– Establish a new mortgage on your new home, if necessary.
– Register the transfers of title, and any new mortgage, with your state or territory land titles office.
– Move from your old home into your new home.
Advantages of simultaneous settlement
– You won’t need to find alternative accommodation. One of the big advantages of simultaneous settlement is you can move into your new place straight away. This means you won’t have to worry about renting a place, or staying with friends or family and storing your furniture, which is usually an issue if you sell first.
– You won’t need a bridging loan. If you buy a new property without first selling your existing home, you will usually have to cover two mortgages – one on your current property and a second one on your new purchase. The second mortgage will usually be a bridging loan. This can be an expensive exercise, and as bridging loans usually come with a time limit (typically a maximum of 12 months) you can be under pressure to sell.
– You can move out and in on the same day. Simultaneous settlement usually involves granting vacant possession of the properties involved on the day of settlement, or on the following day by arrangement. This means that you can move out of your current home and into your new home on the same day (unless you are moving a long distance away), reducing your removal costs and eliminating the need for temporary storage of your possessions.
Disadvantages of simultaneous settlement
It’s a complicated exercise
– It’s a complicated exercise. Most people engage the services of a solicitor or conveyancer because it’s a fairly complex financial and legal process.
– There can be a lot of parties involved. Payments may be required to and from a lot of people and the timing could get quite tricky. For example, you will want payment from the buyer of your old property, and the owner of the property you have bought will want payment from you. Plus your lender and the other party’s lender will want their requirements met. There may even be payment claims from real estate agents under the terms of the sales contracts.
– It requires flexibility. You will usually need to try to negotiate an extended settlement period.
– If you sell your place first, you may stipulate an extended settlement period (e.g. six months) that should allow you enough time to find a new home. If you find a new place earlier, the settlement period may be reduced. But it may be difficult to get the other party to agree.
– If you buy first, you can try to make your purchase ‘subject to completion of sale’ of your existing property. This means you won’t have to settle on your new property until you sell your home. Again though, the seller may not readily agree to this condition, especially in a ‘seller’s market’ where properties are in high demand.
– Concessions may be necessary. To get a simultaneous settlement across the line, you may need to make concessions, such as selling you property for a bit less than you wanted, and buying your new place for a bit more than you planned to pay.
– The settlements rely on each other. If there is a problem at either end, it could lead to delays, possible penalty fees and maybe even the loss of the deposit on your new home. And there can be further complications if there is a chain of settlements involved. One of the parties (the seller or buyer) may be involved in their own simultaneous settlement.
FAQs
What is the best way to achieve simultaneous settlement? The simplest method is to extend the settlement period on either the home you are selling or the place you are buying.
Will I need a bridging loan?
Simultaneous settlement removes the need for a bridging loan. The funds from the sale of your house will pay out your mortgage and anything left over will go towards reducing your new mortgage.
What happens on settlement day?
There are a number of processes your lawyer or conveyancer will undertake on settlement day.
These include:
– Checking all clauses in the sales contract.
– Making adjustments to the transfer prices for advance or arrears payments of council rates.
– Discharging any mortgage on your existing property and ensuring that any previous mortgage on your new purchase has been discharged.
– Removing any rights someone else may have over your new property.
– Registering the transfer of the land and your new mortgage with your state’s titles office.
Bridging loans as an alternative
If you buy first before selling your place, covering two mortgages by taking out a bridging loan could be one path to take.
A bridging loan is taken out on top of your existing home loan and usually has a much higher interest rate and also a time limit (usually a maximum of 12 months).
Many bridging loans are interest-only loans, meaning that your bank will not expect you to repay any part of the loan principal.
You will also need to have a lot of equity in your existing home, and may be required to prove you can meet two sets of repayments. Some lenders will insist you pay both loans at the same time, while others will allow you to pay only the mortgage on your existing property until you sell your home. In this latter case, the cost of the interest on the bridging loan will be added to your new loan principal.
Verdict
Simultaneous settlement can make the transition from your old to new home a fairly smooth process and is certainly worth considering.
However a lot of things need to fit into place for it to be successful and it is important to do your research before going down the simultaneous settlement path. Engaging a solicitor or conveyancer to do the heavy lifting is highly recommended.
