substitute/portability feature of a loan

This is when someone sells a property, rather than closing the loan out with lender, they use the existing loan to purchase another property, basically transfer the loan to the new property.

Just thinking out aloud, the benefit:

1. You may be approved a larger loan amount pre-APRA, but despite you sell a property and conceded a loan amount of $300k, you may not qualify for the same amount post-APRA.
2. This substitute/portability feature may allow you to sell in a market that is peaking such as Sydney/Melb and buy in other market that is recovery/rising, without applying new loan
3. You may not trigger a full application if you're transferring the loan to the new property

Have you used this feature? What are things to watch out for this feature?

 

Timing is the biggest factor. Not easy to get multiple parties to agree to settle on the same day. An alterntive is if the lender will allow a term deposit to be used as security to keep the loan open.

Portability feature will be used more often these days with the tightening up./

 

I've done one, recently. It was to help a family member owner build. They sold one investment property, moved the loan to an unencumbered investment property they already owned and then had the whole of the sale proceeds to waste on their crazy dream.

Serviceability wasn't an issue, it was more about avoiding owner builder policy issues.
That was the first one I've been involved with in 15 years broking.

 

My broker also mentioned to me about both property to be settled on the same day... I thought it was almost impossible to achieve. However a direct call to the Lender's retention group confirm I could do, as you suggested a term deposit to keep the loan afloat. This would probably keep the loan open for say 90 days until I find another replacement property.

What is this term deposit?

Say the loan is 500k with lender, the old property is sold 850k, so after all expenses I pocket 300k..
What money is required for the term deposit? I only now have 300k and I need this for 20% of the new property.

 

The amount on term deposit would need to equal the loan.

 

In that example, I would have to cough up extra 200k to complete the 500k term deposit ....probably works best when I have 50% lvr when selling the property, otherwise..

Perhaps lender is ok with me reducing the loan from 500k to 300k?

What about if you're in a fixed term? would the balance of the fixed term be carried over without breaking? If this is doable you could potentially save thousand in breaking fees and you may fixed at low rate you want to carry forward.

 

You only need 10% for the deposit on the new property. The other 10% will be paid at settlement.

 

and that 20% you can obviously take out from the term deposit?

 

from whereever you want really. at settlemetn your cash being used as security will be released.

 

Been trying to do this with 3 ATM, basically wanted to also do substitution with smaller lenders, but they have no mechanism to hold a deposit, so it means you must settle all at the same time, I have decided that with a credit file that looks like it has been hit with bird shot already, another few hits won't make any difference, so will re apply.

Only some lenders can do what your talking of, call them up and ask.

 

I think they will all allow a reduction if at same LVR (80 or less), increase will mean re application.

 

I would think the lender would have to be a deposit taking institution at least. So no mortgage managers could allow a term deposit as security.

 

Yes, if you want to swap now and then use it on another place after the swap.

No if you ready to do it and settle at same time, which I think you already said.

 

I think this substitute/portability transfer of loan works works well if the property you're selling has 50%LVR, so that after selling your profit is enough to fund the interim term deposit while looking for a replacement property, otherwise you need to cough up the shortfall.

Of course when a replacement property is found( ideally lower purchase price/LVR), you paid the 20% deposit + expenses, and whatever surpass fund you may have in the term deposit.

 

I'll let you know when I do one later this year.....

Unfortunate bit is you can substitute a hard security i.e. land or property...but can do this to a construction loan...oh well will sell security with land which will title and then pay cash for the build.

So long as you can pay the interest and put excess funds in term desposit ..it is worthwhile for 3-4 months of gap...any more interest costs come into play....

 

Sash if you wanted to keep buying land and constructing you could possibly do it on the land component and fund the construction with cash or other borrowings such as a LOC.

 

I have few to/from chat with the lender's retention team....it's one of the big4.

The understanding :

• you can use a combination of cash TD and property for the security
• if you use cash TD alone, its capped at certain lvr. say loan facility was 500k, and if capped at 80% lvr, then 400k loan.
• any variation of the loan, even lesser loan amount, would trigger new credit assessment
• if you don't need the full loan amount for your replacement property, say 400k then you can have a sub account for the 100k...so total loan to 500k intact.
• it's possible using the cash from TD to fund the deposit of replacement property but it's subject to expiry of the TD..

This substitute feature is specific to the lender, as Rolf pointed out. What works with westpac may not work with CBA.

I am seeing people selling out of Sydney/Melbourne. loan is with big4...post-APRA hit them and serviceability impact them, they use Liberty/Pepper for new purchase. Maybe the property substitute is a better choice.

 

Done a few. A bit of a PITA but if its CBA or Westpac etc you can split the loan first to achieve what you want loan amount wise then subbie out to cash and back to property again. Every step involves new loan variations documents though so its not a quick process.

 

but this 'new loan variation' does mean a new reassessment/full, just tedious paper shuffling right?