Am I better off with a simultaneous settlement?
Most Australians will move home at least once or twice in the next 15 years, which is less than half of the standard loan term of 30 years.
To avoid the cost and hassle of refinancing, the loan portability feature on your home loan allows you to take your mortgage with you when you move.
How does loan portability work?
Home loan portability is a feature left over from when mortgages used to come with exit fees. The fee was charged by lenders when you refinanced or even simply switch your home loan product.
Exit fees have now been abolished but mortgage portability is still a standard feature with all home loans.
Essentially, it allows you to transfer your existing mortgage, including the current balance, interest rate, offset account and all other features of the home loan, to the new property.
Think of it as an alternative to simultaneous settlement.
What are the benefits?
Although you’re no longer reaping the benefits of avoiding a mortgage exit fee, there are still pros to loan portability, including:
- Avoiding possible break costs when refinancing a fixed rate home loan.
- Saving hundreds of dollars in upfront costs when applying for another home loan for the new property. The bank is simply replacing your home with a new security.
- Avoiding the time and hassle of having refinancing your mortgage and applying for a new loan.
- Keeping your current home loan features, debit card or card, online bank account and checking account.
- Keep your same lender and interest rate.
- There may be extra options on the loan portability feature that may allow you to, for instance, switch over from a variable or fixed interest rate. Check to see what applies with your lender.
Who is it good for?
It’s good for people that have a fixed interest rate and want to avoid break costs.
Borrowers with business loans secured by the property often go down this path because paying off the mortgage at settlement would have tax implications.
How do I qualify?
There are certain requirements and restrictions that apply depending on your lender.
As a general rule:
- Same-day settlement: With some lenders, the exchange of contracts and settlement for both properties needs to be on the same day. For other lenders, this isn’t a requirement.
- Acceptable property: The new property must be an acceptable security in an acceptable location based on the bank’s requirements.
- Valuations need to stack up: Some lenders may require that the new property and your old one are of equal value or that the new property needs to be of higher value.
- Loan amount remains unchanged: Typically the loan amount can’t change, however, some banks allow you to ‘top up’ your loan in case you’re a little short.
- Be careful of the Loan to Value (LVR): If the new mortgage is over 80% of the property value of the new property, you’ll have to pay Lenders Mortgage Insurance (LMI).
We usually recommend to our clients to only refinance or use loan portability feature when moving houses when you owe less than 80% on your mortgage. That way you have sufficient equity and can avoid LMI.
Please call us on 1300 889 743 or complete our free assessment form to find out if using your loan portability feature is the right option for you.
What do I need to provide?
You need to provide the Contract of Sale for your property and the property that you’re buying.
Banks will usually undertake a valuation of both properties to ensure that the LVR is acceptable.
If the valuation comes in short, you’ll have to come up with your funds to complete the mortgage transfer.
If the valuations are ok, you’ll then be issued with new mortgage documents with the details of the new property. You’ll need to sign these and return them to the bank so they can prepare settlement.
How long will settlement take?
We generally see a 1-week turnaround with borrowers that use home loan portability.
How much does it cost?
Most lenders will charge around $200 or so to transfer the mortgage but luckily this doesn’t change no matter the amount of the loan.
On top of that, you still have to pay for the normal costs of purchasing a new home such as stamp duty, solicitors fees and other legal costs.
It’s important to speak with your mortgage broker to work out whether you’ll have enough left over from the sales proceeds of your old home to cover these costs or whether you’ll have to front-up these costs yourself.
You’ll also be charged around $300-$600 for the valuation unless you go through a mortgage broker who can order free upfront valuations.
What are the drawbacks?
Loan portability is not always the cheap and stress-free process that banks promise:
- Bank staff often make mistakes with loan portability and don’t fully understand the process.
- There will still be a partial reassessment of your situation, if not a full application that you’ll need to complete.
- You won’t need to sign a new loan contract but you will if you’re borrowing more money. Then you’ll have to go through the normal mortgage application process anyway!
In fact, in most cases, you won’t be able to change the loan structure without paying a fee, whether you want to switch from a basic to a professional package, change to a cheaper interest rate or add more borrowers to the mortgage.
Are there alternatives to using the loan portability feature?
If you’re not on fixed interest rate then you’re often better off getting a new loan on the new property and simply paying out the old loan.
This is known as simultaneous settlement.
Alternatively, you can switch the mortgage in order to have cash as security if you sell your home first. You can then move the mortgage onto the new property.
Australians and moving home
The Australian Bureau of Statistics (ABS) Survey of Income and Housing 2013-14 found that:
- Most Australia won’t stay in their current place of residence for more than 15 years.
- Around 26% of Australians aged 15-34 spent less than 5 years in their home.
- While the majority of both renters and homeowners moved to a new property within the same suburb, locality or state or territory, around 6% moved interstate.
- 17% of Australians moved because they wanted a bigger or better home.
- Around 10% of households said that they wanted to move house but 42% of those people said they either couldn’t afford to or that the move would be too much effort.
Buying a new property?
Speak to a mortgage broker and we can help you weigh up the pros and cons of loan portability.
If you’re planning to move soon and aren’t sure what to do about your home loan, give us a call on 1300 889 743 or complete our free assessment form.