Buying Before You Sell in NSW: The Risks If You're Relying on Sale Proceeds
Picture this: you've found your dream home on the Northern Beaches, but your current property hasn't sold yet. The pressure is on: do you make an offer and risk it all, or let the perfect place slip away?
If you're relying on your sale proceeds to fund your new purchase, buying before selling creates a domino effect of financial and legal risks that could leave you in serious trouble. Let's break down exactly what you're facing and how to protect yourself.
What Actually Happens When You Buy Before You Sell?
When you purchase a new property before your current one has settled, you're essentially juggling two major financial commitments simultaneously. You'll need to secure financing for your new home while still being liable for your existing mortgage: and that's just the beginning.
The moment you sign that contract of sale for your new property, you're legally bound to settle on a specific date, regardless of whether your current home has sold. This creates immediate pressure and puts you in a vulnerable position that savvy sellers and buyers can exploit.
Are You Ready for Dual Mortgage Payments?
The biggest financial risk is carrying two mortgage payments at once. If your current property doesn't sell quickly, you'll face monthly repayments on both your existing loan and your new home loan. For most families, this can strain cash flow to breaking point.
Here's where it gets trickier: banks assess your borrowing capacity based on your current debts and income. When you're carrying two mortgages, your debt-to-income ratio skyrockets, which can:
• Reduce your borrowing power for future loans • Trigger margin calls if your equity position weakens • Force you to dip into emergency savings just to meet monthly obligations • Impact your credit rating if you struggle with repayments
Even worse, if your financial situation deteriorates while carrying dual mortgages, lenders might reduce your approved loan amount or withdraw pre-approval entirely, jeopardizing your new purchase.
What About Bridging Finance: Is It Worth the Cost?
Some buyers consider bridging finance to cover the gap between purchases. While this can provide short-term relief, bridging loans typically charge higher interest rates than standard mortgages and come with strict repayment terms.
Bridging finance also requires additional legal documentation and often includes penalty clauses if your existing property doesn't sell within the agreed timeframe. You're essentially paying premium rates for the privilege of taking on more risk.
Could You Lose Your Negotiating Power Completely?
Once you've committed to buying your new home, time pressure becomes your enemy. Potential buyers for your current property can sense desperation, and this puts you in a significantly weaker negotiating position.
You might find yourself:
• Accepting lower offers than your property is worth • Agreeing to unfavorable settlement terms to speed up the sale • Reducing your asking price multiple times to attract buyers quickly • Paying for expensive marketing to accelerate the sale process
The financial pressure of dual mortgages often forces sellers to make decisions they wouldn't normally consider, potentially costing thousands of dollars in lost equity.
What Are the Legal Complications?
NSW property law doesn't provide much wiggle room once you've signed contracts. You're legally obligated to settle on your new purchase by the agreed date, regardless of your current property's sale status.
Failure to settle can result in: • Forfeiture of your deposit (typically 10% of the purchase price) • Legal action from the vendor for additional damages • Penalties and interest charges for delayed settlement • Potential bankruptcy in extreme cases
Additionally, if you're moving from your principal place of residence, you need to consider Capital Gains Tax implications. You have a 6-month window to qualify for the Main Residence Exemption when acquiring a new home before selling your old one. Missing this deadline can trigger unexpected tax liabilities that further strain your finances.
How Unpredictable Is the NSW Property Market?
Property markets can shift rapidly, and there's no guarantee your home will sell quickly or for your expected price. Recent market volatility has shown that properties can sit on the market for months longer than anticipated, especially in certain price brackets or locations.
Market factors beyond your control include:
• Interest rate changes affecting buyer demand • Economic uncertainty reducing buyer confidence • Seasonal fluctuations in property activity • Local market conditions specific to your suburb • Competition from other sellers in your area
If the market softens while you're carrying dual mortgages, you face a perfect storm: reduced buyer interest for your existing property and potential negative equity if values decline.
What Happens If Your Sale Falls Through?
Even if you find a buyer for your current property, sales can fall through at the last minute. Common reasons include:
• Buyer financing issues or loan rejection • Building and pest inspection revealing problems • Vendor finance complications • Chain reactions if your buyer is also selling
When a sale collapses close to your new property's settlement date, you're left scrambling to find alternative financing or face the legal consequences of failing to complete your purchase.
How Can You Protect Yourself?
If you absolutely must buy before selling, several strategies can help minimize your risks:
Financial Protection: • Get pre-approval for a second mortgage before making offers • Maintain substantial emergency savings to cover 6-12 months of dual mortgage payments • Work with a mortgage broker to explore all financing options • Consider income protection insurance in case of job loss
Legal Safeguards: • Negotiate extended settlement periods (90-120 days) in your purchase contract • Include subject-to-sale clauses where possible (though sellers often reject these) • Review cooling-off period options carefully • Get professional legal advice before signing anything
Market Risk Management: • Price your current property competitively from day one • Invest in professional marketing to maximize exposure • Consider rent-back arrangements with potential buyers • Have backup financing plans ready
When Should You Walk Away?
Sometimes the smartest decision is not to buy before selling. Walk away if:
• You can't comfortably afford dual mortgage payments for at least 12 months • Your current property has been on the market for over 6 months without serious interest • You're stretching your budget to its absolute limit • The property market in your area is clearly declining • You don't have access to emergency funds or family financial support
Making the Right Choice for Your Situation
Buying before selling isn't necessarily a bad decision: it depends entirely on your financial position, risk tolerance, and market conditions. The key is understanding exactly what you're getting into and having solid contingency plans.
Consider your options carefully and don't let emotions drive your decision. That dream home might feel perfect, but if it puts your financial future at risk, it's worth waiting for the right opportunity when your current property has sold.
If you're considering this path, professional advice is essential. A qualified conveyancer can help you understand the legal implications and structure your contracts to provide maximum protection. At Beaches Conveyancing, we've helped many Northern Beaches residents navigate these complex decisions safely.
Ready to discuss your specific situation? Contact our team for expert guidance tailored to your circumstances: because the right advice now can save you thousands later.
