Are you looking to upgrade or downsize your home but not sure whether to buy the new home first or sell your existing home?
This can be a difficult decision to make. If you buy first before selling, you may have to pay two mortgages for some time. If you sell first before you buy, you will have to pay rent on another property until you find another property to buy. But there is a third alternative…
It’s called a simultaneous settlement.
In this article, we will tell you everything you need to know about a simultaneous settlement, including one tip that can save you thousands of dollars.
Let’s dive in.
- What is simultaneous settlement?
- What is going to be best for me?
- What are the steps involved?
- Advantages of Simultaneous settlement
- Disadvantages of a simultaneous settlement
- Bonus Tip: Extending the settlement period (avoid this mistake)
- Bonus: Frequently Asked Questions
What is simultaneous settlement?
Settlement is the final step when transferring property ownership from the seller to the buyer. This is the stage where you pay the remaining amount of the asking price and are given the keys to your new home. It usually happens weeks (sometimes months) after you have exchanged contracts of sale and paid your deposit.
A simultaneous settlement means arranging for the settlement for the sale of your old property and the settlement of the purchase of your new home to happen at the same time. The deposit for the new home comes from the sale of your hold home!
In simple terms, you buy your new home at the same time that you sell your old one.
With a simultaneous settlement, the money from selling your old property goes towards paying off the remaining mortgage, and any surplus will reduce the mortgage on your new home.
Read more: 5 simple steps to settlement
What is the best option for me?
It is all going to come down to your individual situation, you want to consider how quickly you can sell your existing home if you’d like to sell your existing home or hold onto it as a rental and if you had enough income to support the total borrowing required.
Given these financial questions we’d suggest you speak with one of our mortgage brokers about your situation but in general the best way to gauge your situation:
- ✅ Selling Existing Home First: If your property is going to take months to sell, it might be best to sell first and release your deposit funds so you know how much deposit you have for your new home.
- ✅ Buying New Home First: If you have lots of equity in your existing home, and enough income to hold both properties ongoing this option will work for you. This is commonly done if you are turning your existing home into an investment property.
- ✅ Simultaneous Settlement: If you can sell your existing property relatively quickly, and if you have no intention of holding onto your existing property you can make a simultaneous settlement work.
- ✅ Bridging Loan: If you have lots of equity in your existing home, and sufficient income to hold the total lending until you sell your exiting home this option can work. Bridging loans can be expensive, and cost you much more in interest, more info here.
As mentioned everyone’s situation is going to be unique, so if you are unsure what option will work for you best contact our team.
What are the steps involved?
Simultaneous settlement can be a little tricky to coordinate and we recommend getting a good mortgage broker.
Here are the steps involved:
- With the help of your mortgage broker, get a pre-approval from your bank to purchase the new home, but on the condition that you will sell your existing home at the same time.
- Put your home on the market. You can choose to get a real estate agent to help you with putting your home up for sale.
- While your house is being prepared to go on the market, start looking for the home you want to buy.
- Hire a lawyer or conveyancer to help you with the settlement process.
- Once you get an offer for your old home and you have gone past the cooling-off period, then put an offer for the new home. If you put in an offer on the new home while the old home is still in the cooling-off period, you run the risk that the buyer may decide they no longer want to purchase your old home when you have already paid a deposit for the new home.
- Arrange for a long settlement period on the sale of your house – even up to 6 months – with the option of bringing it forward as long as you give 4 weeks’ notice. This gives you enough time to negotiate on the new property and then bring forward the settlement on the old property so that they settle simultaneously.
- Discharge the mortgage on the old property and establish a mortgage on the new property
- Register the transfer of title and mortgage with your state authority
- Congratulations! You can now move from your old home directly into your new home!
Even though we have simplified these steps as much as possible, simultaneous settlement is a very tricky process. It requires experienced mortgage brokers to ensure your paperwork is all on point. The last thing you want is to have your new loan declined on settlement day!
Read more: What is a pre-approval?
Advantages of Simultaneous settlement
Simultaneous settlement has many advantages:
- ✅ There is no need for temporary accommodation. This is one of the biggest advantages because you can move straight from your old home into your new home without worrying about finding a place to rent, staying with friends and family and putting your furniture into storage – these are all issues you face if you buy first. So simultaneous settlement not only saves you money on temporary accommodation but also saves you a lot of hassle.
- ✅ You can move on the same day. Vacant possession of the property is usually granted on the day of settlement (or the next day)
if you are doing simultaneous settlement. This reduces your removal costs, and you don’t even spend a single night in temporary accommodation.
- ✅ You won’t have to pay two mortgages at the same time, i.e. a bridging loan. With simultaneous settlement, you won’t have to take out a bridging loan. You need a bridging loan if you buy a new property before selling the old one. Bridging loans can work out to be expensive, and they usually come with a time limit of 12 months.
- ✅ You can refinance the loan for your existing home and replace it with the loan for the new home in the same transaction, therefore saving you money in transaction fees.
- ✅ With simultaneous settlement, you can disconnect and reconnect services from your old property to your new property in one phone call or email.
Disadvantages of a simultaneous settlement
A simultaneous settlement also has its disadvantages:
- ⛔️ It isn’t easy. Simultaneous settlement is not something you can DIY as it is a very complex arrangement that usually requires the expertise of a mortgage broker, a lawyer or a conveyancer to help you with all the legal and financial paperwork required.
- ⛔️ Lots of parties are involved – which increases the chances of something going wrong. As the saying goes, too many cooks spoil the broth. You will require payment from the person buying your property, and the seller will require payment from you. This means the buyer’s bank, your bank, and the seller’s bank should have all of their requirement met – and we know that each lender has different requirements.
- ⛔️ Your negotiation skills must be on point:
- If you have stipulated an extended period for the settlement of your old home, then if you find your new place early, you will have to negotiate to reduce the settlement period with your buyer. Your buyer may not always agree to this unless it was stipulated in the contract.
- If you buy first before your old home is sold, then you will have to negotiate for ‘subject to completion of sale’ of your old property, and the seller may not agree to this.
You may need to compromise on price. Since timing is everything when it comes to simultaneous settlement, you may have to sell your home for a little lower than desired or buy the new home a little higher than planned.
- ⛔️ The settlements rely on each other. If there is a problem with one of the processes, it can cause delays which may mean lots of money in penalties and, in extreme cases, the loss of the deposit on your new property. It is also possible that the other party may be involved in their own simultaneous settlement!
All these disadvantages make it very necessary for you to get an experienced mortgage broker because a single mistake can cost you thousands of dollars.
Bonus Tip: Extending the settlement period (avoid this mistake)
As we mentioned above, it is common for homebuyers who go the simultaneous settlement route to have very long settlement periods of up to 6 months.
There are two ways to do this:
- Option 1: You can sell your old home before finding the new one and then have the option to bring forward settlement when you find the right property so that both properties settle on the same day. The risk with this is that if you don’t find the right property in time, you may have to move to temporary accommodation. This is a better risk than option 2.
- Option 2: You buy your new home before selling the old one and then have a settlement of 6 months on the new home with the option of bringing it forward when you sell the old home. This is very risky because if you don’t sell your old home in time, you might lose the deposit on your new home – that’s thousands of dollars! So we don’t recommend using this option.
Bonus: Frequently Asked Questions
We have included a few frequently asked questions on the simultaneous settlement process.
What is a contemporaneous settlement?
A contemporaneous settlement is the same as a simultaneous settlement, it just means both the home you are selling and the home you are buying have to happen at the same time, on the same day.
Should I buy first or sell first?
If you buy first, you will have to pay for two mortgages for some time, which may be expensive. If you sell first, you may need to find alternative accommodation until you buy the new house, which can take some time.
This is where simultaneous settlement comes in handy.
What is the best tip for a successful simultaneous settlement?
The best tip is to extend the settlement period on the house you are selling or on the house you are buying.
What is the difference between a simultaneous settlement and a bridging loan?
A bridging loan is a loan you take out to buy a new property while selling your current one. In simple terms, A bridging loan means that you can still have your existing home and get a loan on the new one. This means you will pay interest on 2 mortgages until you sell your old home.
In general, you need a very high income and lots of equity in your existing property to be able to do a bridging loan. If your lending is over 70% of your property LVR you wont be able to do bridging.
With a simultaneous settlement, the money from selling your old home will pay for the mortgage, and the remainder will reduce your new loan. So instead of having 2 loans (as is the case with a bridging loan), you will have only 1 loan.
Next steps and getting your home loan
Simultaneous settlement can make moving from your old home to your new home quite smooth. However, the process needs to be handled with much care…
Our team at Hunter Galloway is here to help you buy a home across Australia.
Unlike other mortgage brokers who are just one-person operations, we have an entire team of experts dedicated to helping make your home loan journey as simple as possible.
If you want to get started, please give us a call on 1300 088 065 or book a free assessment online to see how we can help.
More resources for homebuyers
- How to get the most out of your buyer’s agent
- What is LVR and how to calculate it
- The ultimate guide to upgrading your home