Everything You Need to Know About Refinancing Before You Sell

Buying Before You Sell? How Refinancing Could Help

Understanding how to access equity, manage your borrowing capacity and plan your next property purchase.

Buying your next home before selling your current property can provide greater flexibility, particularly when you're trying to secure the right property without rushing the sale of your existing home.

For homeowners in Malvern, Malvern East and surrounding suburbs, refinancing may provide an opportunity to access existing property equity to help fund the next purchase.

However, buying before selling requires careful financial planning. Having sufficient equity doesn't necessarily mean you can borrow more, and lenders will consider your income, existing commitments and ability to manage additional debt.

At Balcombe Financial, we help clients understand their options and structure their finance to support a smooth transition between properties.

When Does Refinancing Before Selling Make Sense?

Refinancing before selling may be worth considering when you have substantial equity in your existing property and want to purchase another home before your current property settles.

This approach can be particularly useful if you:

• Have found your next home but aren't ready to sell your current property.
• Want to avoid making an offer conditional on selling your existing home.
• Need flexibility around school terms, employment or family commitments.
• Have sufficient equity to contribute towards the deposit and purchasing costs of another property.
• Can demonstrate the borrowing capacity required to support the proposed lending arrangements.

For example, a family living in Malvern East may have built substantial equity in their home over the past decade. They've found a suitable property in Caulfield North but would prefer to remain in their existing home until the end of the school year.

Rather than immediately selling, they may be able to refinance their current mortgage and release sufficient equity to contribute towards the next purchase.

This is a hypothetical example, and the feasibility of such an arrangement would depend on the family's financial position, available equity and lender assessment.

The key is establishing whether the proposed lending structure is both achievable and financially appropriate before committing to another purchase.

Understanding How Equity Release Works

Equity is the difference between your property's current market value and the amount you owe against it.

When refinancing, a lender may allow you to increase your existing loan to access some of that equity, provided you meet its lending criteria.

Consider the following example:

In this example, the homeowner has $800,000 in total equity, but the amount potentially available to access without lenders mortgage insurance is $520,000.

Importantly, this doesn't mean the lender will automatically approve an additional $520,000.

The amount available will depend on your income, existing liabilities, living expenses, credit history and the lender's assessment of your ability to service the increased debt.

Different lenders also have different policies regarding equity release, acceptable loan purposes and the supporting documentation required.

Can You Use Equity as a Deposit on Your Next Home?

Yes. Subject to lender approval, equity released from your existing property can potentially be used towards the deposit and associated purchasing costs of your next home.

This can reduce the need to sell your current property before entering into a new purchase contract.

However, there are two separate considerations.

Accessing the equity: Your existing property must have sufficient available equity, and you must qualify for the additional borrowing.

Financing the new purchase: You must also demonstrate that you can afford the lending required to complete the purchase, taking into account your existing mortgage and other financial commitments.

A lender may assess your ability to service both properties during the period in which you own them simultaneously.

This is where early financial planning becomes particularly important. Understanding your borrowing capacity before making an offer can help you avoid committing to a purchase that may be difficult to finance.

Structuring Your Loans Before Buying Another Property

The way your lending is structured can be just as important as the interest rate you receive.

When accessing equity for another property purchase, it may be beneficial to establish a separate loan split rather than simply increasing your existing mortgage balance.

A separate loan split can make it easier to identify the amount borrowed for the next purchase and manage that debt independently.

Depending on your circumstances, your lending structure might include:

• An existing home loan covering your current mortgage balance.
• A separate equity-release loan to assist with the deposit and purchasing costs.
• A new home loan secured against the property you're purchasing.
• An offset account linked to an eligible variable-rate loan to help reduce interest costs.

For example, if you release $200,000 in equity but don't immediately require the full amount, holding unused funds in an eligible offset account may help reduce the interest charged while retaining access to those funds.

An offset account generally reduces the balance on which interest is calculated, rather than reducing the amount legally owed.

Care should also be taken when considering fixed-rate lending, particularly if you intend to sell your existing property shortly afterwards. Repaying a fixed-rate loan before the end of its term can result in break costs.

If your current property may become an investment property, the structure and use of borrowed funds can also have tax implications. These should be discussed with your accountant or tax adviser before making changes.

What Will Lenders Consider When Assessing Your Application?

One of the most important considerations when buying before selling is whether you can demonstrate sufficient borrowing capacity.

Even where a homeowner has substantial property equity, lenders must assess whether the proposed lending is affordable.

Their assessment will generally consider:

• Your employment income or self-employed earnings.
• Existing mortgages and other financial commitments.
• Household living expenses.
• Credit card limits and personal loans.
• Dependants and other ongoing financial obligations.
• The proposed repayments on the new lending.
• Your plans for selling the existing property and repaying the associated debt.

Where you intend to retain both properties temporarily, some lenders may require you to demonstrate that you can service both mortgages.

Other lenders may have policies that allow them to consider an anticipated property sale or a clearly documented debt-reduction strategy.

These policies vary, and an intended future sale does not automatically remove the existing debt from a lender's serviceability assessment.

Working with an experienced mortgage broker can help identify lenders whose policies are better suited to your circumstances.

Should You Refinance Before Listing Your Property for Sale?

Timing can have a significant impact on your refinancing options.

If you're planning to access equity from your existing home, it's generally worth reviewing your finance before placing the property on the market.

Some lenders may be reluctant to approve a refinance where the property securing the loan is already listed for sale or is subject to a sale contract.

This is because the lender needs to consider how long the proposed security will remain available and whether the loan structure is appropriate for the intended purpose.

However, lender policies differ, and refinancing may still be possible in certain circumstances.

Ideally, you should establish your borrowing capacity, understand the equity available and agree on an appropriate finance strategy before committing to a purchase or sale timetable.

Refinancing can take several weeks, depending on the lender, valuation requirements, application complexity and settlement arrangements.

Allowing sufficient time can reduce the risk of unnecessary delays or financing complications.

What Costs Are Involved in Refinancing Before Selling?

Refinancing can involve additional costs, particularly where the existing property will be sold shortly after the new loan settles.

Potential expenses include:

• Loan establishment or application fees.
• Property valuation fees.
• Mortgage discharge and registration costs.
• Government charges where applicable.
• Fixed-rate break costs, if relevant.
• Lenders mortgage insurance where the proposed lending exceeds applicable thresholds.

Some lenders offer refinancing arrangements with reduced or waived upfront fees, while others may charge additional costs depending on the loan structure.

It's also important to consider the interest expense associated with temporarily holding increased debt.

For example, releasing equity several months before you need it could result in additional interest costs unless an appropriate offset arrangement is available.

The financial benefits of buying before selling should therefore be considered alongside the costs of establishing and maintaining the lending.

A mortgage broker can help compare the available options and assess the overall cost, rather than focusing solely on the advertised interest rate.

What Happens to Your Mortgage When Your Existing Property Sells?

When your existing property sells, the lender holding the mortgage will generally require the loan secured against that property to be repaid as part of settlement.

Your conveyancer or solicitor will coordinate the settlement process, including obtaining the lender's payout figure and arranging the discharge of the mortgage.

The payout amount will generally include the outstanding loan balance, accrued interest and any applicable fees or charges.

Once the secured debt and other settlement obligations have been satisfied, the remaining sale proceeds will be available to you.

If you've previously released equity from that property to fund your next purchase, it's important to understand how the relevant loans will be repaid or restructured.

In some circumstances, a lender may permit a loan to continue under a different security arrangement, such as an approved substitution of security. This requires lender approval and cannot be assumed.

Planning the loan structure from the outset can help avoid unnecessary complications when your existing property eventually sells.

Is a Bridging Loan a Better Alternative?

Refinancing isn't always the most suitable option when purchasing another home before selling your existing property.

A bridging loan may provide an alternative.

Bridging finance is designed to assist borrowers who need to complete a new property purchase before receiving the proceeds from selling their existing home.

Rather than establishing a conventional refinance and separate purchase loan arrangement, bridging finance can provide a temporary funding structure that takes the anticipated sale into account.

Depending on the lender, bridging arrangements may offer features such as interest-only repayments or capitalised interest during the bridging period.

However, bridging loans can also involve higher costs, stricter conditions and time limits for selling the existing property.

If the property takes longer than expected to sell, or sells for less than anticipated, the borrower may face additional financial pressure.

The most suitable approach will depend on your available equity, borrowing capacity, expected sale proceeds and the time required to complete both transactions.

In some circumstances, selling first and purchasing later may remain the more financially appropriate option.

Why Early Advice Can Make a Difference

Buying and selling property involves several moving parts, particularly when the transactions don't occur at the same time.

Your borrowing capacity, property valuations, deposit requirements, loan structure and settlement dates all need to work together.

An experienced mortgage broker can help you assess these considerations before you commit to your next purchase.

At Balcombe Financial, we work with a panel of more than 40 lenders, allowing us to explore different lending policies and structures based on your individual circumstances.

Whether you're considering refinancing, accessing equity or arranging bridging finance, our focus is on identifying a suitable lending solution that supports your broader financial objectives.

The aim isn't simply to obtain additional finance. It's to ensure the proposed borrowing is appropriate, manageable and structured with your next move in mind.

Planning to Buy Before You Sell?

If you're considering purchasing your next home before selling your current property, understanding your borrowing options early can make a significant difference.

At Balcombe Financial, we help homeowners across Malvern, Malvern East and Melbourne assess their available equity, understand their borrowing capacity and explore suitable lending structures.

Contact Michael at Balcombe Financial on 0429 179 060 to discuss your options, or book an appointment at a time that suits you.

General information only. Lending is subject to credit assessment, lender policy and individual circumstances.