Relocation Loans: How do They Work?

Firstly what is a relocation loan? There are a number of variations, but essentially they are most commonly used if a purchaser has entered into a contract to purchase and are relying on proceeds of the sale of another property, with later settlement date. The financial institution lends the client the funds required to purchase the new property using both properties as there security for the loan. Once the other property is sold the loan is either paid out or reduced to what is referred to as the residual mortgage.

The loan is used to bridge the period between settlements, using the client’s equity in their existing property. These types of loans also have the name ‘bridging finance’, which is not as popular a term, as it brings back memories of expensive loans with high interest rates.

Most modern day loans are much more appealing, as the interest rates are in most cases the same as the standard products the institutions offer. The loans generally allow for a six to twelve months bridging period, but can vary depending on the institution. Interest over this period will be charged on the full mortgage, however most lenders only require that repayments during this period be calculated on the anticipated residual mortgage. At settlement unpaid interest is paid and the loan is reduced to the residual mortgage or paid out in full.

This type of loan often appeals when there is a shortage of good property for sale. Many people are reluctant to sell if they have not found a new home to purchase, particularly if prices are rising. If there is good equity in your existing property this can become a viable option. The most attractive feature of these loans is that most institutions base their affordability calculations on the residual mortgage, the benefit being that you can qualify without income if you are not left with residual mortgage after settlement.

Whenever considering a relocation loan it is most important that you have a very realistic appreciation of the value of the property you wish to sell. I say this, as many people do not realise that you can control the price you pay for a property, however you can only achieve the best price the market has to offer at any given time when selling. Remember, the longer the selling period, the more interest accumulates at peak mortgage level.

Relocation loans are an excellent product if used appropriately. A realistic expectation of your property value and a comfortable residual mortgage repayment could make this a very viable option.

Please feel free to call us with any questions you may have regarding any type of loan you may be interested in or to find out what loan is right for you.

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