Mortgage Portability: Taking Your Loan to a New Home

For many New Zealand homeowners, the prospect of moving house comes with a hidden financial headache: what happens to your existing mortgage? If you have locked in a good fixed rate, breaking it early to buy a new property can result in eye-watering break fees, sometimes tens of thousands of dollars.

This is where mortgage portability comes in. It is a feature offered by most major banks that allows you to transfer your existing mortgage, including your current interest rate and terms, to a new property. Done right, it can save you significant money and hassle during what is already a stressful time.

How Mortgage Portability Works

In simple terms, mortgage portability means your loan moves from one property to another. When you sell your current home and purchase a new one, instead of discharging your mortgage and taking out a completely new loan, you port the existing loan to the new property.

Your current interest rate, fixed term period, and loan conditions remain intact. The security for the loan simply changes from your old property to your new one. From the bank's perspective, it is essentially the same loan secured against a different address.

Conditions and Limitations

Mortgage portability sounds straightforward, but there are several conditions and limitations you need to understand:

Time limits: Banks typically require that your new property settlement occurs within a specified window of your old property settling, usually between 30 and 90 days depending on the lender. If the gap is too long, portability may not be available.

Requalification: You do not automatically get to port your mortgage just because you had one before. The bank will reassess your financial position, including income, expenses, and the new property's value. If your circumstances have changed significantly, you might not qualify.

Property type: The new property must be acceptable security for the bank. Investment properties, unusual constructions, or properties in certain locations might face additional scrutiny or restrictions.

Loan amount changes: If you are buying a more expensive property and need to borrow more, the additional amount will typically be at current market rates, not your existing rate. If you are downsizing and reducing your loan, some conditions may still apply.

When Portability Works Best

Mortgage portability is most valuable in specific scenarios. Understanding when it shines helps you plan effectively:

Conversely, portability matters less if you are on a floating rate (no break fees anyway), your fixed term is almost up, or current rates are actually lower than your existing rate. In these cases, breaking and refinancing might be the better option.

The Process Step by Step

If you are planning to use mortgage portability, here is what to expect:

1. Check your eligibility: Contact your bank early in your planning process to confirm your mortgage is portable and understand their specific requirements and timeframes.
2. Get pre-approval for the new property: The bank will assess your current financial position and the properties you are looking at. This is similar to getting a new loan approved.
3. Coordinate your sale and purchase: Work with your real estate agent and solicitor to align settlement dates within the bank's required window.
4. Complete the paperwork: Your solicitor will handle the discharge of mortgage from your old property and registration on your new property. The bank's internal processes transfer the loan.
5. Continue with your existing terms: Once settled, you continue paying your mortgage at the same rate and terms, just against your new home.

Bridging Finance and Portability

Sometimes buying and selling do not align perfectly. You might find your dream home before selling your current property, or your buyer might need longer than your purchase timeline allows. This is where bridging finance comes into play.

Bridging finance is a short-term loan that covers the gap between buying your new home and selling your old one. It can work alongside mortgage portability, but adds cost and complexity. The bridging period accrues interest (often at a higher rate), and you will need to satisfy the bank that you can service both properties temporarily.

Questions to Ask Your Bank

Before assuming your mortgage is portable, have a detailed conversation with your lender. Key questions include:

• Is my specific loan product portable, and are there any exclusions?
• What is the maximum time allowed between old and new property settlements?
• Will I need to requalify, and what documentation will you require?
• If I need to borrow more, what rate will apply to the additional amount?
• What fees, if any, apply to porting my mortgage?
• What happens if my sale falls through after I have committed to a purchase?

Getting clear answers to these questions early in your planning helps avoid nasty surprises later in the process. A good mortgage adviser can also help you navigate these conversations and compare options if your current bank's portability terms are not ideal.

When to Consider Other Options

Portability is not always the best choice. If current market rates are lower than your existing rate, it might make sense to break your mortgage, pay any break fee, and refinance at the better rate. The maths sometimes works in your favour, particularly if you were on a high rate with significant time remaining.

Similarly, if your circumstances have changed significantly and you want to restructure your mortgage, such as splitting between fixed and floating portions, a fresh start might offer more flexibility than porting your existing structure.

The key is running the numbers for your specific situation. Break fee plus new loan costs versus continuing with your current rate; the better option is whichever saves you more money over the remaining term.