What is home loan portability?

Looking to upsize, downsize, or move to a new area? Chances are that you’ve got a lot on your mind – from scouting neighbourhoods and debating if you need a pool, to touring schools for the little ones. 

You might also be wondering if you need a new home loan, and what will happen to your current mortgage if you move.

One mortgage feature could help ease the stress of moving: home loan portability.  

What is home loan portability? 

In essence, home loan portability offers you the option to take your home loan with you when you move house. 

Home loan portability is sometimes called a substitution of security or security swap – and these names perhaps better explain the mechanism at play. 

If your lender offers home loan portability and you wish to move houses, you can simply swap the property used as security on your mortgage and continue making your repayments as normal. 

It also means you can keep all the features of your existing home loan, down to your direct debit arrangements. 

What normally happens to a mortgage when a home is sold?

When you take out a home loan, you’ll generally use the home you’re buying as security for that loan.

That means that, in the event you default on your mortgage repayments, your bank or lender can take your home and sell it to recoup its losses. 

Having security against a mortgage is very important. Indeed, the very definition of ‘mortgage’ means to offer up something of value in exchange for borrowing money. 

So, what typically happens when you sell the property used as security on a home loan?

Traditionally, if an owner-occupier moves houses, they’ll sell their home, repay their lender the funds borrowed to buy the initial home, then take out a new home loan in order to buy a new place. 

Each of those steps can be paperwork-heavy and time consuming, not to mention expensive, as lenders tend to charge to open and close mortgage accounts.

Home loan portability for fixed rate borrowers 

While home loan portability might represent less paperwork, a shorter turnaround time, and fewer upfront costs for a variable rate borrower, it could save a fixed rate borrower thousands of dollars in break fees.

When you enter into a fixed rate home loan contract, you agree to make your repayments as planned for the duration of your fixed rate period. In exchange, your lender promises to keep your interest rate the same for that period of time.

If you sell your property and repay the home loan early, you’ll have broken your promise and your lender might charge you a break fee. 

If your home loan offers portability, you’ll simply be able to shift the security of your mortgage from one property to another, allowing you to keep making your repayments. By doing so, you might be able to dodge any potential break costs.

The nitty-gritty: How does home loan portability work?

Mortgages and associated terminology can be confusing, and that’s particularly true when details need to line up perfectly, as is the case if you plan to rely on home loan portability. 

Transferring your home loan from one property to another requires precision. Here are some aspects to consider when tossing up swapping the security on your home loan.

Could I be limited by the value of the properties being bought and sold?

The first thing worth mentioning is that you’ll typically need to be swapping the security on your home loan from one home to another of an equal or greater value, in the eyes of your lender. 

If your new property is worth less than your old place on paper, you might have trouble initiating a security swap. 

Do I need to buy first, sell first, or settle both sales at the same time?

Home loan portability can get complicated at settlement time. 

Fortunately, you don’t necessarily have to settle both properties simultaneously. Though, some lenders will ask that both transactions settle within 90 days of one another.

Here’s how the process might work depending on the order in which you buy and sell.

Same-day settlement

The ideal situation is that both properties settle on the same day, meaning the person buying your property does so at the same time a seller is ready to transfer their property to you.

Such precision isn’t always possible, and if it’s not, you might have other options.

Selling before buying

If both properties can’t settle on the same day, selling first is typically an easier route to follow.

If you sell your home before you buy a new one, your lender will likely ask for the value of your home loan in cash, which will act as temporary security for the loan. Your lender may hold the loan amount in a term deposit until the second settlement is complete.

Once you buy your new property, your home loan will be reinstated. In the meantime, you’ll continue making your regular repayments.

Buying before selling

Finally, if you find your dream property before you sell your current one, don’t worry. 

You might consider taking out a bridging loan, allowing you to purchase your new property while your home is on the market. 

When your home sells, you’ll use some of the proceeds to repay the bridging loan and your home loan lender will transfer the security from your old property to the new one.

What if I need to increase or decrease the size of my home loan?

Things also get more complicated if you need to increase or decrease the amount you’ve borrowed. 

If your current home loan and any savings you’ve set aside aren’t enough to cover the purchase price of your new home, you may need to ‘top up’ your loan.

If your home loan has a fixed interest rate, you may choose to take out a new loan facility to span the financial void. 

If you’re interested in decreasing the size of your home loan, however, you might encounter difficulties. 

Oftentimes, the property being added as security on a mortgage must be of equal or lesser value than the one being removed. That means, if you’re in need of a smaller home loan, you may need to forgo a security swap and instead close your current home loan facility and open another. 

It’s worth checking in with your lender to learn about its processes and procedures in such cases. 

Other considerations 

Home loan portability, while useful in many situations, can be finicky. 

If your home loan is unusual – if you turned to the Home Guarantee Scheme or hold a speciality mortgage product (like a green home loan), for instance – you might not be eligible for a security swap.

The process of swapping the security used for your home loan may also incur a fee. However, this fee will likely be less than the cost of closing one loan and opening another.

Additionally, if you’re behind on your mortgage repayments, you may not be able to use a portability feature.

Finally, you don’t necessarily have to be selling your home and buying another to undergo a security swap. For instance, if you own multiple properties or hold other assets, you may be able to transfer your mortgage’s security interest to one of these instead.

If your lender offers the option of a security swap, it might be worth reaching out to it to ask if you’re a suitable candidate for the feature.

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