A relocation loan, also known as a bridging loan, is a short-term loan designed to help homeowners cover the cost of purchasing a new property while in the process of selling their current property. It provides buyers temporary financing to buy first and sell later or to cover the interim of two settlement dates. A relocation loan is particularly useful in competitive real estate markets, where timing can make or break a property sale.

Beyond getting a relocation loan to ‘build a bridge’ between an existing mortgage and a new property purchase, the main consideration is whether there will be a debt, known as an ‘end debt’ following the sale proceeds and the new purchase costs. Two common scenarios are:

  1. No end debt due to downsizing or downgrading. The current property’s sale proceeds covers the cost of purchasing the new property and discharges the mortgage in full.
  2. An end debt due to upsizing and upgrading. The new property requires a mortgage, and the lender must ensure the borrower/s can afford the loan.

When there’s an end debt, the loan amount is usually calculated as the peak debt being the sum of the new purchase price + current mortgage balance = bridging loan amount. The peak debt is also used to calculate lenders mortgage insurance (LMI). However, other factors around the settlement timing might increase the bridging loan amount. These can include rent, storage, and moving costs (if applicable) and buying costs e.g. stamp duty, legal fees etc.

To get pre-approval for a bridging loan, borrowers must meet borrowing capacity tests, have sufficient equity in the current mortgage, and show evidence of the current property being on the market. Other key considerations include:

  • Must be with current lender to leverage the equity in the existing mortgage.
  • Not all lenders offer relocation loans.
  • Some lenders exclude land purchases where a construction loan is needed.
  • During the bridging period, some lenders prohibit borrowers accessing their redraw facility from their existing mortgage.
  • The required equity in existing loan ranges from 20-40%, including buying costs.
  • Maximum loan term is 6-12 months, which means the existing property must be sold within that timeframe.

While relocation loans relieve a lot of the stress involved and enables a stronger position for buyers to make an offer in terms of price and settlement timing terms, it comes at various cost implications such as:

  • Higher interest rates.
  • Loan fees.
  • Interest-only repayments—putting pressure on cash flow and the principal loan doesn’t reduce for the bridging term.
  • Capitalised interest—unpaid interest is added to the principal loan i.e. the new mortgage for the new property.
  • Additional interest charges on total debt while holding both properties—a six-month process to sell the existing property incurs six months of interest charges on the peak debt (current mortgage balance + new purchase price).

Given all the potential cost implications of a relocation loan, it’s worth considering what alternative strategies could be available. Aside from the ideal scenario of a synchronised settlement for the sale and the purchase, homeowners could consider these special conditions:

  1. Subject to sale clause. When making an offer on a new property, propose to the vendor/real estate agent that finance is subject to the sale of your current property.
  2. Extend settlement terms to 90 days instead of a 30-day settlement period. This gives three months to secure a new property purchase.

However, these strategies could backfire in a competitive real estate market.

For those buyers who will be purchasing a new property through a ‘no end debt’ scenario, then there’s a range of solutions to facilitate the interim period between the two settlements. Your broker at Get Real Finance can help guide you through this scenario to find the best way forward. Our team is adept in assessing and leveraging all types of finance structures, loan products and features. Whether you’re looking for a relocation loan or security substitutions for loan portability, we can help.