How Mortgages Work When Moving House
Understand the complexities of managing your mortgage when moving house. Navigate financing, sale, and purchase with expert guidance.
Moving to a new home presents a unique set of financial and logistical challenges, particularly when an existing mortgage is part of the equation. Unlike a first-time home purchase, relocating involves coordinating the disposition of a current property and its associated financial obligations with the acquisition of a new residence. This process requires careful planning to manage an existing financial commitment while simultaneously securing new financing. Understanding the intricacies of this transition is important for a smooth and efficient move.
Managing Your Existing Mortgage
When moving, you can either port your existing mortgage or redeem it. Porting allows you to transfer your current mortgage product, including its terms and interest rate, to your new property. This is subject to lender approval, which involves reassessing your financial situation and valuing the new property.
A benefit of porting is retaining a favorable interest rate. However, complications can arise, such as needing a “top-up” loan if the new home is more expensive. This additional financing may have different terms and rates. Early repayment charges (ERCs) could also apply if only a portion of your mortgage is ported or if the process triggers a partial repayment.
Alternatively, you can redeem your existing mortgage by paying it off in full when your old property sells. This typically occurs on the day of sale, using sale proceeds to satisfy the loan. Redeeming offers flexibility to seek a new mortgage product with any lender, potentially offering more competitive rates or terms.
Redeeming your mortgage often incurs early repayment charges if you are within a fixed-rate or introductory period. These charges typically range from 1% to 5% of the outstanding loan amount. For example, a 3% ERC on a $200,000 balance would be $6,000. Calculating these potential costs is important when deciding whether to port or redeem.
Redeeming and obtaining a new mortgage might be preferred if your current terms are unfavorable or if you desire a different lender or product. This approach provides a clean slate, allowing you to shop for the most suitable mortgage for your next home. The decision between porting and redeeming hinges on analyzing your current mortgage terms, potential early repayment charges, and new mortgage interest rates.
Securing Financing for Your New Home
Financing your new home often begins with leveraging accumulated equity. Equity is your home’s value minus your outstanding mortgage. Upon sale, this equity is released and can serve as a substantial portion of the down payment for your next property. Utilizing this capital reduces the amount you need to borrow, potentially lowering monthly payments or allowing a more expensive home.
Lenders assess your financial health when applying for a new mortgage or top-up. You will typically need to provide documentation like recent pay stubs, W-2 forms, tax returns, and bank statements for the last 60 to 90 days. Lenders also review your credit history, including your credit score, payment history, and existing debt obligations.
Lenders assess affordability using income multiples and debt-to-income (DTI) ratios. Income multiples determine how much a lender will lend based on your annual income, while DTI compares total monthly debt payments to gross monthly income. A common DTI guideline is 36% to 43%, though this varies. A strong credit score, generally above 670, can lead to more favorable loan terms.
Mortgage lenders offer loan products directly, while brokers work with multiple lenders to find suitable options. Brokers can help compare rates and terms, saving time. When completing mortgage application forms, you will provide detailed personal and financial information, including your Social Security number, current address, employment history, and property specifics.
If there’s a gap between purchasing a new home and selling an existing one, a bridging loan can provide temporary funds. These short-term loans are typically secured against your existing home or both properties. They have higher interest rates (7% to 15% annually) and usually a 6 to 12-month term. Bridging loans are a temporary solution when timing is critical.
Navigating the Sale and Purchase Process
Coordinating home sale and purchase involves logistical complexities, often forming a “property chain.” This is a sequence of transactions where one sale depends on another. Managing these chains requires precise timing for simultaneous contract exchange and completion dates. This minimizes owning two properties or none, ensuring seamless fund transfer.
Before legal processes, property assessments are conducted. A lender’s valuation assesses the property’s market value for mortgage security, primarily benefiting the lender. Buyers may commission their own surveys, such as a HomeBuyer Report for major defects or a Building Survey for comprehensive structural analysis.
The legal process, conveyancing, is handled by solicitors or licensed conveyancers. They manage the legal transfer of property ownership. Key stages include drafting contracts and conducting property searches with local authorities, revealing information like planning permissions, environmental factors, or property restrictions.
The exchange of contracts makes the sale and purchase legally binding. A deposit, typically 10% of the purchase price, is paid by the buyer and held by the seller’s solicitor. On completion day, ownership officially transfers, the remaining balance is paid, and keys are handed over.
Beyond mortgage payments, several associated costs are incurred when moving house:
Legal or conveyancing fees: Typically range from $1,500 to $5,000.
Survey and valuation fees: From a few hundred dollars for a basic valuation to over a thousand for a comprehensive building survey.
Property transfer taxes: Levied by state or local governments, varying significantly by property value and location.
Mortgage arrangement or origination fees: Charged by lenders, often 0.5% to 1% of the loan amount; product fees may also apply.
Removal and moving expenses: Can add several hundred to several thousand dollars, depending on volume and distance.