Moving between houses is challenging enough, and sometimes we are faced with the problem of adjusting our mortgage at the same time. The changing of mortgages has to be carefully managed so that home owners can minimize costs. Luckily, simply calculating the break cost and understand bridging finance concepts can help make the change of loans easier.
In theory, moving between two households should be easy. You just have to find a property you like and then sell your home for a profit. In reality, changing homes is never that simple. In order to sell a property at a high price, simply moving to a new house may not be the best solution. Everything ultimately boils down to timing. Home owners have to decide if they want to sell their old property before they buy a new home. The most conservative choice is to sell before buying. Once the old property is sold, home owners know the exact amount they can spend on purchasing a new property. This helps to limit stress and makes it easier to look for financing options.
If home owners sell a home first, they have to find a place to stay while they look for a new home. This can be frustrating and difficult. In terms of cost, it can also be an expensive prospect. Home owners have to pay for moving twice and store products. Even the cost of connecting utilities an additional time can add up quickly. Likewise, home owners can lose money on the equity they have in the property. If home prices are rising faster than a cash management account, the home owner would have earned more money if they had sat on the house for longer.
Instead of selling first and buying later, home owners can try to buy a new property first. This is easier for the moving process, but can be risky. If the home takes too long to sell or receives a lower price, the home owner can lose significant amounts of money. Buying first also means that the home owner does not know the size of mortgage that they can afford. While the exchanges take place, they are stuck paying two mortgages and can end up with more debt than they expected. Home owners will also have to have the money to cover a deposit upfront and cannot wait for the profits from selling their old house.
A deposit bond is essentially a guarantee that the purchaser will give their deposit when the settlement is over. This is effectively a promise to the lender that they will cover costs. In general, these bonds cost about one per cent of the deposit and can be an excellent short term financing option.
Like the name implies, bridging finance is a way to bridge the gap between buying a new house and selling an old one. They typically cover the cost of the new purchase and have significantly higher repayment plans. If the old property sells for less than the new one, the owner has “end debt”. Bridging finance normally has lower fees than other financing options because it is only used for a short period of time. People who are switching house, or changing their original home into an investment property can alter their finances to be ‘negatively geared’. This term refers to people who are in theory ‘losing’ money on their investment, but are actually making a profit because of tax breaks and other concessions made available. Negative gearing calculators can help people to understand the benefits and risks associated with this type of finance option. A popular negative gearing calculator can be found here (courtesy of http://www.smartline.com.au).
A borrower can choose to refinance with their current lender or get a new mortgage with another bank. This can only be done if the lender allows the loan to be taken to a new property. Home owners can also pay the remainder of their existing loan if they want to switch financing institutions.
The break cost is a term that covers all of the exit penalties for leaving a loan early. When someone switches loans or uses a new lender, they have to pay break costs. Basically, the interest rate charged on the original loan is a payment to the lender for risks and for holding the loan.
Switching households and changing loans must be done intelligently. Planning in advance and preparing financially can help to lower the overall costs to the home owner.