If you plan to buy and/or sell your home this year, make sure you get advice from an experienced mortgage adviser before you start the process. Changing your loan to suit your new situation is not always straightforward and there will most likely be a number of different options available to you. Staying on the right path towards building wealth requires correctly structuring your new loan(s) in line with your goals and your financial situation.
What happens to your existing loan when you sell?
If you took out a home loan when you bought your existing property, your lender will have placed a mortgage on your property. In other words, they have a financial interest in your home and their name appears on the property title. When you sell the property, this process is essentially reversed and you will need to pay the lender back. This is called a discharge of mortgage and it needs to be arranged before settlement.
A discharge of mortgage can take a few weeks so it’s best to arrange this as soon as you can once the sale of your property is certain. There may be fees involved, depending on the type of loan you have. All this money will come out of the proceeds of your sale, along with other selling costs such as legal fees and agency fees. If you aren’t buying another property, the balance will then be transferred into your bank account.
Loan options when selling and buying
If you are buying a property as well, you typically have two options in terms of financing the new property. You may be able to get a substitution of security if your lender offers loan portability; otherwise, you need to take out a new loan.
Substitution of security
Some loans allow ‘loan portability’, which means you can take the loan with you when you move from one property to another, rather than paying it out in full and opening a new loan. This can be a good option as you should save on refinancing costs and it is usually more convenient as you will have the same lender and the same account details. If your new property is more expensive, you can apply for a top-up to increase the loan amount.
If your lender doesn’t allow loan portability, you need to apply for a new loan. In this case, there’s no real advantage in staying with your existing lender, so it’s usually a good opportunity to consider what loan deals are available on the market. With the help of your mortgage adviser, you may find you can secure a more competitive rate or better loan features with a different lender.
Don’t forget the myriad extra costs that come with buying, particularly stamp duty, legal fees and Lenders Mortgage Insurance if you are borrowing more than 80% of the property’s value.
Keeping your existing home as an investment
Your mortgage adviser should be able to help you calculate whether you have enough equity to keep your existing home and turn it into an investment property when you buy your new home. While this might be an effective way to build wealth if you have the financial capacity, you should discuss the pros and cons of this with a financial adviser as you will be taking on significantly more debt and financial risk.
Finance when buying first
If you find your dream home before you sell, could you afford to buy first? While you may be able to arrange a ‘simultaneous settlement’, it’s notoriously difficult to do, so you should always consider what will happen if you are unable to find the right buyer for your property until after you settle your new home. There are several options available to help you finance any gap between the settlement of your new home and the sale of your existing one.
You should start by asking your lender if you could increase your existing home loan to cover the amount required for your purchase; however, you typically need significant equity to do this.
Alternatively, you may be able to secure a bridging loan. These loans are typically only for a period of six to 12 months and involve taking out the bridging loan to fund the deposit on your new property, then repaying the balance when your existing home is sold. Bridging loans are expensive so the shorter the period you need it for, the better. On the plus side, they can be worth it if it provides you with the breathing space you need to sell your home for a good price. Unfortunately, if the market is slow, it can backfire as you may not get a good price even with the benefit of time. You will eventually still have to sell to comply with your loan requirements, and then you will also have had the significant expense of the bridging loan on top of the lower sale price.
You can also try using a deposit guarantee to secure your new home instead of a cash deposit, although the vendor needs to agree to its use. You will still be racing the clock to sell your home; however, it is typically a cheaper alternative to bridging finance and may allow you to secure your new home before you’ve sold.
Buying and selling is an exciting time, but it’s essential to manage your borrowing in the most efficient way possible. It’s highly advisable to use an experienced mortgage adviser to assist you in finding the most suitable options when you transition to your new home.