The average holding time for Australian property is reported to be 10.6 years, meaning that it is very common for a property owner to change or upgrade their property within a decade. The upgrading process from a mortgage perspective may be more complicated than you may have previously thought, so let us explore some of the common borrowing strategies when it comes to changing/ upgrading your property.
Scenario 1: Buying Before Selling
When buying a property you’ll need to pay an upfront deposit, and a common 6-week settlement period before you pay up the full amount. If you bought the property before you sold your last one, you may not have the full amount for the new property. But people usually choose to buy before selling to avoid the hassle of looking for temporary accommodations.
Bridging Loan
Bridging loans are short-term loans (up to 6-12 months) that will be used to temporarily finance your funding shortfall in purchasing the new property, and once you sell your old property normally you can repay the bridging loan in full.
Advantages:
No need to make concessions on your property sale price;
You can opt to not make regular payments on the bridging loan (only pay in lump sum when your property is sold)
Disadvantages:
Accrued interest and costs associated with bridging loans;
Penalties associated when exceeding the loan term;
Bridging loan limit is based on your current property value.
Cash-out Refinancing
If your existing property value increased in the last few years, you may want to refinance your loan at a higher amount than your existing loan balance, and use the additional funds (known as cash-out) to pay for your new home.
Advantages:
Utilize existing equity of your property for funding， take advantage of cash back and lower interest rate when refinancing.
Disadvantages:
Your borrowing capacity is dependent on your property price and the loan amount you have.
Scenario 2: Selling Before Buying
If you choose to sell your property before buying a new one, you’ll receive the equity you own in the property (property sale price minus amount still owed on the loan). Normally you would not require any financing for the deposit, and you can go through the normal loan application procedure for the new property. There is less anxiety involved with financing, but you’ll be faced with the hassle of looking for temporary accommodations in the meantime.
Portability Loan
Loan portability is a feature where you can keep the loan with your existing lender and just change the loan security from your old property to your new property.
Advantages:
Keep the same loan features, and probably no need for a new loan application.
Keep existing associated facilities such as packaged credit cards, redraw/offset accounts, etc.
Disadvantages:
A fee may be charged for this product;
Differences in property values may lead to some complications.
Scenario 3: Simultaneous Settlement
If you have enough savings, you may choose to pay the deposit with your own money.
You may choose the portability loan, so the bank can swap the loan security on the settlement day altogether.
Or you can also choose to apply for a new loan, and the bank can close off the old loan account, and set up the new loan account on the settlement day.
Are you planning to change or upgrade your properties at the moment? Contact your professional mortgage brokers at MoreMore Finance for more information.
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