Does this situation sound familiar? Your house is on the market and you’ve just found your next dream home. You need the proceeds from the sale of your current property to purchase the new one, but after entering into a contract, you discover the settlement date for the new property is earlier than the settlement on your current house. What a dilemma! This is where a relocation loan comes into play. Basically, the loan is used to bridge the gap between settlements, using the equity in your existing property. Relocation finance allows you to make the deposit on your new home and finance the balance upon closing.
Of course, not all loan options are the same, so it’s important to do your research with the banks to find the right one for you. And as with anything, you should never borrow more than you need. Here’s a look at some of the pros and cons of taking out a relocation loan.
The most obvious advantage to these types of loans is that it allows you to buy your new property right way, before your current home is sold. This means you can quickly secure that new home rather than risk it slipping through your fingers will you wait. Other advantages include:
- Giving you time to negotiate a better price on your property. A quick sale can be stressful and oftentimes sellers take lower offers than expected as a means of obtaining a quicker settlement.
- You can gradually move your belongings to your new home while your current property is being prepared for sale.
- Some loan options offer standard variable interest rates, and interest-only repayments which are capitalized on your peak debt until you sell your existing home.
- Unlimited P&I repayments. Some loans allow you to make as many repayments as you like until you sell your property, to reduce your interest bill.
- Saves the costs of renting and moving twice. Some people find they have to rent somewhere while they wait for their new property to become available, which means twice the relocation costs. However, it’s important to speak to a finance professional and weigh up your options and costs before finding the best solution.
Well, obviously, a relocation loan is still a loan and therefore means more debt. Furthermore, interest is compounded monthly and although it’s capitalised on top of the peak debt, the longer it takes to sell your property, the more your loan will accrue interest. Here are some other disadvantages to consider:
- You could potentially be charged higher interest rates for a relocation loan than a standard home loan.
- Those unlimited payments you’re allowed to make sadly don’t have no redraw facility if for some reason you need to do so.
- Many lenders will charge a higher interest rate if your property doesn’t sell within the set time frame.
- If your current lender doesn’t offer a relocation loan product, another lender may insist on taking the entire debt, meaning you’re not only up for application costs with the new lender, but also early termination costs with the previous if you switch during a fixed interest period.
- You will need to pay for two valuations, one for your existing property, one for the new purchase.
- Relocation loans are only short-term, usually around six to twelve months. If your property does not sell within this time, you might need to significantly lower your price to sell it in time.
There are a number of factors to consider before deciding to take out relocation finance. While they can be extremely beneficial in the process of buying and selling, it’s important to speak to a finance professional to find out if this is the best option for you.