As a first-time buyer, you probably haven’t put too much thought into what might happen if you wanted to move house or change your home loan in the future. After all, you have enough on your plate buying that first property.
Still, it’s something that you need to keep at the back of your mind. Changing your home loan later on down the line can benefit you financially. However, you also open yourself up to some issues. Things like deposit bonds, bridging loans, and break costs may not mean much to you now, but they will if you decide to make a change.
You’ll have to think about whether to sell first and buy later or vice-versa. Each option has its advantages and disadvantages, so let’s look at the whole issue of making a change in more detail.
The Moving Home Problem
It all seems like it should be so easy. In an ideal world, moving home would be as simple as finding somewhere new and selling your old house to buy it.
That’s rarely the way it works out, as there are all sorts of things that can affect the move from one home to the next.
For one, trying to get the move done as quickly as possible may mean that you have to sell your current home for less than its worth. You may also struggle to find a new home, but have plenty of buyers interested in your current home.
Then, there are the extra problems. Will you have to deal with break costs if you change your home loan? What do you do in the period between selling your old home and buying your new one? You need answers to these questions before you can move forward.
The decisions you make will often come down to timing. The opportunities that become available to you will determine if you sell or buy first.
Selling first is the safer option, as it should leave you with the money you need to make the purchase. However, you also have to consider where you’re going to go during the period between making the sale and buying a new house. Do you have family who can put you up for a while, or are you going to have to rent somewhere? It’s an important question to ask before you decide to sell.
You may also need to absorb some unexpected costs. Your temporary residence may not have the space needed for all of your stuff. Thus, you may have to rent a storage unit until you buy your new home.
Current property prices may also develop a sneaky cost in the form of lost equity. For example, let’s say that selling your home has netted you $100,000. You can put this in a savings account and earn 5% interest on it. However, property prices may be going up by more than 5%. This means that you will lose the money you would have gained if your cash was still tied up in your old property.
Buying a new property first becomes a much more attractive proposition when you consider the issues attached to selling first. After all, you get the convenience of moving straight into your new home upon selling the old one. Unfortunately, there are also issues you need to keep in mind with this option.
You’ll find yourself essentially paying two home loans during the period between buying your new home and selling your old one. Every month that the selling process drags on results in another payment leaving your bank account. Delays add pressure to finalise the sale, which could lead to you selling for less than the value of your old property. While this will help you avoid the short-term cost, it means you lose money overall.
Beyond that, buying first requires you to have the money to put down a deposit, without having sold your current property. There are three ways you can overcome this issue:
● Take out short-term credit. ● Use a deposit bond. ● Get a bridging home loan.
Short-term credit seems like the simplest solution. However, the high interest rates attached to such loans could set you up for financial difficulties in the future. That makes both bridging loans and deposit bonds more attractive.
Bridging Home Loans
A bridging home loan covers the cost of the new home, based on the assumption that the sale of the old home will get rid of the debt the bridging loan creates. That means both properties act as security on the loan.
The bridging option increases the payments you make on your home loan, but this only lasts for a short time. As soon as you’ve sold your old home, the payments revert back to what they should be for the new property alone. In some cases, the lender will capitalise the extra monthly money onto the amount you’ll owe on the new home. This means you don’t face a huge increase in your monthly outgoings, but you will have to pay more back on the new home.
You may also need to repay an “end debt”. This occurs if selling your old property does not cover the debt you created when you bought the new property. Even so, you may find dealing with the end debt preferable to taking out a bridging loan in which your monthly costs skyrocket to cover the debt.
Deposit bonds are a little more complicated to arrange than bridging loans, but also offer a good alternative to short-term credit. These are documents that promise the seller the deposit upon settlement, rather than during the contract exchange.
A company will cover the deposit bond, promising the seller the deposit if the buyer pulls out in the process. This company then receives the deposit from the buyer upon sale of the old property, which it uses to cover its costs.
You’ll find a deposit bond usually costs a percentage point or two more than the deposit itself. This extra bit of money covers the work of the bond issuer. Even so, that extra 1 or 2% can prove to be preferable in comparison to short-term credit.
What About Switching Home Loans
Switching your home loan when you buy a new property muddies the waters a little more. As a general rule, you have two options if you want to switch to a new loan:
● Refinance the current loan with your existing lender. ● Pay off the current loan so you can take another out with a new lender.
Some lenders will allow you to move your loan from one property to the next, often after charging a fee for the trouble. Your current lender may even offer more attractive refinancing rates to keep you on board.
If your lender doesn’t offer this option, you will need to absorb the break costs involved in paying off of your old loan.
Use uno's calculator to estimate your savings.
Calculate Savings ### A Word on Break Costs
Few lenders will allow you to pay off a large portion of your mortgage without charging additional costs. Most will charge you a break cost, which you have to pay to “break” the terms of the home loan.
Break costs apply to fixed-rate mortgages only, as these require you to enter into a contract with a lender. Breaking that contract means the lender loses out on the interest they would have collected on the loan. The break cost covers this loss.
Lenders charge break costs because lending money at a fixed rate creates an ongoing cost. The profit attached to the loan is often quite low, which results in break costs being non-negotiable.
On the plus side, the National Consumer Credit Protection Act (NCCP), prevents lenders from charging massive break costs. Even so, you still need to consider them when switching home loans.
What to do next
So, what do you need to do if you want to move home or switch your home loan? Follow these steps to get started:
This information is general in nature, and you should always seek professional advice when making financial decisions.