What is home loan portability?
Home loan portability is a feature of a home loan that makes it “moveable”—depending on overall eligibility.
Home loans usually have a security attached to them.
In the case of a residential home loan, the security is usually a residential property. Commonly, the home you live in acts as security for your home loan.
A report released by the ABS on housing mobility for 2019-2020 stated 28% of home owners moved home within the previous five years. It happens – a lot.
There are many obstacles to moving home. Applying for a home loan being one of them.
If your lender offers a feature known as home loan portability, then you may be able to move your home loan with you in the event you move home—without applying for a new home loan.
Home loan portability vs Security substitution
Home loan portability, also known as security substitution (or even security swap) is the same thing – just a different picture of the same end result.
If you are a picture-person who needs to see to understand, I have illustrated both for you.
The result is the same – a new security supports an existing home loan.
I will use ‘home loan portability’ in this article. I have another article adopting security substitution as the key term where I take you through real examples. The articles refer to each other to reinforce the fact the terms mean the same.
So, what do the banks call it?
Have a look at this extract from a real home loan offer. The lender has successfully intertwined both home loan portability and security substitution terms:
How does home loan portability work?
Let’s use an example.
Say I want to move home but I do not want to apply for a new home loan. I want to take my home loan with me and not apply for brand new lending.
I can do this a couple of ways:
Home loan portability: Sell first – wait – then buy
I sell my home and, if my lender allows it, I keep my home loan open and do not close it.
I might park some cash from the sale proceeds next to the loan to keep my loan active – “alive” – until I find another property. Not all banks allow this, and not all banks that do will allow it for longer than a few months.
By securing the home loan with cash from the sale proceeds I have changed the security for my loan from property to cash using the sale proceeds.
And yes, there are fees as well as the continuing interest cost. An advantage a new home application can have over a cash substitution.
When I find my new property, my lender would normally do a bank valuation. Once the property is approved, I swap out the cash security and replace it with the new property.
I settle.
Same loan – same loan account number – different property – I carry on.
An illustration of this is below:
Home loan portability: Sell and buy at the same time
If you can arrange a simulatneous settlement – sell and buy at the same time – you can skip the middle part of the process above that needs cash as security.
A settlement on the same day sounds tricky, but is a very common thing.
Explainer: Cash as security
Only a small number of lenders offer a cash security feature—it is usually designed to be temporary.
The cash used for security is usually from sales proceeds.
The spirit of allowing cash as security for a home loan is to maintain an open home loan open while you look for your next property. It is for this reason some lenders limit the time it can be in place to months as opposed to years.
Unlike property, LVR’s for cash security are calculated differently. Usually, lenders require a dollar for dollar arrangement. If you want to secure a $100,000 home loan then you will need $100,000 in an acceptable account at the lender. Some require 10% more.
The cash account is usually ‘locked’ by the lender – so that funds are not mistakenly withdrawn while it is securing the loan.
Is home loan portability worth it?
There are many reasons for considering home loan portability. I list some of them here.
Personal financial position
Sometimes a property comes up at the wrong time. Borrowers could have started a business as and be transitioning to a stronger financial position. This could mean they fall in between the cracks proving this to lenders for a new home loan application.
If they already have a home loan, then home loan portability could be an option.
Timing
In an environment where there are long waiting times for application assessments, a home loan portability can (not always) be a quicker process.
If there is a gap between selling and purchase, some lenders can entertain holding the loan open against a cash security – like a savings account.
Happy with current product
If a borrower is happy with the loan and the lender, they may be able to take the loan with them. Loan features will stay the stay – such as term and repayment type. An example of someone wanting to stay with their product is if they are on an excellent fixed rate and do not want to give it up before expiry.
Avoid early repayment penalties
Sometimes borrowers take a loan with them – they are not always happy with the loan. As some fixed rates can have extremely high early repayment penalties – keep a fixed loan open rather than paying it out can save on fees.
Preservation of useful debt
Sometimes there are loans worth keeping. This can be the case with some investment loans.
I wrote an article showing how I preserved a very useful investment loan for a borrower using a security substitution.
Most of all.
Seek your own advice – a mortgage broker can explore home loan options to suit your specific circumstances. This is a general information article.
Considerations for home loan portability?
Most home loan portability requests require the following conditions for it to work. I am only listing some of them here. You need to talk to a mortgage broker to discuss your specific situation.
Bridging loan
A bridging loan is another loan option to assist with moving house. Home loan portability comes into the picture when you do not have enough equity for a bridging loan, and do not wish to make a new loan application.
Lender
Your existing lender needs to be able to do it. You cannot move from one lender to another with home loan portability – that would require a refinance home loan.
The main reason for engaging a mortgage broker early. Of the lenders that can offer home loan portability, some do it better than others.
Loan to value ratio (LVR)
Lenders do not want to increase their risk without reviewing a full loan application. A key measure of risk is the LVR. Generally, home loan portability requires the new proposed LVR to be the same or lower than the current LVR. A lender will usually order a bank valuation on the new property to determine the LVR.
Loan limit
Increasing a loan limit needs a full assessment. Home loan portability would require your loan limit to not change – and possibly reduce.
Same ownership
Home loan portability requires many similar themes to carry through from the old property to the new. It is unlikely a lender would consider a home loan portability request if ownership was to change.
Type of property
The type of property should be similar. Any proposed new security should be checked with a mortgage broker or lender. Home loan portability works well when loans are transferred from one house to another, both in a metropolitan suburb, sharing similar characteristics.
A residential property and commercial property would be unlikely to see approval for home loan portability.
Fees
Surprisingly, the fees for a home loan portability process generally fall within $300-500. Given home loan portability often involves a property transaction, there are much bigger transaction costs that should also be allowed for.
Final word
Your lender gave you a home loan based on your situation at the time.
Home loan portability is a feature that allows borrowers to change house. To see if it is a feature of your home loan check with your lender or a mortgage broker. It is sometimes a specific line item withing your loan offer agreement. Here is a snippet from another loan offer detailing the home loan portability feature:
As part of weighing up any future house moves, include home loan portability as one of your options to explore with a mortgage broker. If you already have a home loan, you may be able to move home and take it with you.
