Buying Before Selling

Why Buy Before You Sell

For homeowners looking to move up, downsize, or relocate within the GTA, the timing of buying and selling rarely lines up perfectly. Buying before selling gives you the advantage of securing your next home without the pressure of being homeless between transactions. You can take your time finding the right property, negotiate from a position of choice rather than desperation, and move directly from one home to the next.

The downside is financial complexity. Owning two properties simultaneously means carrying two mortgages, two sets of property taxes, and the ongoing costs of maintaining both homes. If your current home takes longer to sell than expected, the financial strain can become significant.

Assessing Your Financial Position

Before committing to buy first, you need a clear picture of your finances. Speak with your lender or mortgage broker about whether you qualify for a second mortgage while still carrying your existing one. Lenders will assess your ability to carry both payments using the same GDS and TDS ratios they apply to any mortgage application.

Key questions to answer include:

• How much equity do you have in your current home, and how much of it can be accessed through a home equity line of credit (HELOC)?
• Can you qualify for a new mortgage without relying on the proceeds from your current home's sale?
• Do you have liquid savings to cover the down payment and closing costs on the new home?
• How long can you comfortably carry both properties if your current home does not sell immediately?

Bridge Financing

Bridge financing is a short-term loan designed to cover the gap between buying your new home and receiving the proceeds from the sale of your current one. It is typically used when the closing date on your purchase falls before the closing date on your sale.

Most major banks and many alternative lenders offer bridge loans in Ontario. The loan amount is usually based on the equity in your current home, and the term is short, typically 30 to 90 days. Interest rates on bridge loans are higher than standard mortgages, often prime plus 2 to 4 percent, and there are setup fees involved.

To qualify for bridge financing, you generally need a firm sale on your current home. Lenders want to see a signed Agreement of Purchase and Sale with a confirmed closing date. Without a firm sale, bridge financing is difficult to obtain from traditional lenders.

Using a HELOC

A home equity line of credit (HELOC) is another option for accessing the equity in your current home to fund the purchase of a new one. A HELOC allows you to borrow against your home's equity as needed, up to a set limit, typically up to 65 percent of the property's appraised value minus the outstanding mortgage balance.

The advantage of a HELOC is flexibility. You can draw on the funds when you need them and repay them when your current home sells. Interest rates are variable, typically tied to the lender's prime rate, and you pay interest only on the amount you have drawn.

If you think you may want to buy before selling in the future, setting up a HELOC in advance is a smart move. Applying for one when you are under time pressure is not ideal. Arrange it early so the funds are available when you need them.

The Sale of Buyer's Property Condition

One way to reduce risk when buying before selling is to include a condition in your offer that makes the purchase conditional on the sale of your current home. This gives you a set period to sell your property before you are committed to the purchase.

The challenge is that this condition makes your offer significantly less attractive to sellers. In a competitive market, sellers will almost always choose an offer without this condition over one that includes it. This condition is more realistic in a balanced or buyer's market, where sellers have fewer competing offers.

Some sellers will accept this condition but include an escape clause, commonly called a 48-hour or 72-hour clause. This allows the seller to continue showing the property and accept other offers. If the seller receives another acceptable offer, you are given a short window to either waive your condition and go firm or walk away.

Aligning Your Closing Dates

If you manage to sell your current home and buy a new one, the ideal scenario is to align the closing dates so the sale and purchase happen on the same day. Your lawyer coordinates the transfer of funds from the sale to the purchase, and you move directly from one home to the other.

In practice, perfect alignment is difficult. If your sale closes before your purchase, you may need temporary housing or a leaseback arrangement with the buyer of your old home. If your purchase closes before your sale, you need bridge financing or alternative funds to cover the gap.

Work closely with your agent and lawyer to negotiate closing dates that minimize the gap. Even a few days of overlap can be managed with bridge financing, but weeks or months of carrying two properties can be financially stressful.

Risks to Consider

Buying before selling carries real risks that you need to acknowledge and plan for:

• Your current home may sell for less than expected, leaving you with a shortfall on your new purchase
• Your current home may take longer to sell than planned, extending the period you are carrying two properties
• Market conditions can change between the time you buy and the time you sell, particularly in a declining market
• Bridge financing costs add up and are not insignificant over even a short period
• The stress of carrying two properties can lead to accepting a lower price on your sale just to close the gap

Discuss these risks candidly with your agent and your financial advisor. Have a contingency plan in place before you commit to purchasing. Know your worst-case scenario and make sure you can handle it financially.

Making the Decision

Buying before selling works best when you have significant equity in your current home, strong cash reserves, a high degree of confidence that your home will sell quickly, and a clear understanding of the financial risks. If any of these factors are missing, selling first may be the safer path.

Your real estate agent and mortgage professional can help you evaluate your specific situation. Every case is different, and the right strategy depends on your financial position, the current market conditions, and your tolerance for risk.