Changes in life stage, such as a job transfer or a growing family, can make it necessary to move to a new home. However, if you are still repaying your current mortgage, many people understandably wonder whether moving is even possible. In those situations, a home replacement loan can be a practical option. In this article, we explain in detail the features of a home replacement loan, the process for using it, and the key points to watch out for.
What Is a Home Replacement Loan?
A home replacement loan is a financing product that allows you to borrow both the remaining balance on your current mortgage and the funds needed to purchase your new home. Unlike a standard mortgage, it includes the outstanding balance in the new borrowing, which makes larger financing possible, but the interest rate is higher as a result. Because the new home serves as collateral, purchasing and living in a newly acquired home is a condition of the financing.
What Conditions Must Be Met to Use a Home Replacement Loan?
A mortgage balance remains even after selling your current home
If you can fully repay your mortgage with the proceeds from selling your current home, there is no need to use a home replacement loan, because you can simply take out a new standard mortgage instead. The basic requirement for using a home replacement loan is that an outstanding balance still remains after the sale.
Your loan and payment history must be strong
Late payments on loans or utility bills are reviewed very carefully during the financing assessment. Because home replacement loans involve a large borrowing amount, the screening process is also stringent, and a history of delinquency may lead to a denial.
What Are the Two Main Ways to Use a Home Replacement Loan?
When the sale comes first
This approach prioritizes selling your current home first. One advantage is that the sale price is confirmed first, which makes financial planning easier. On the other hand, it has the drawback of requiring temporary housing costs and the cost of moving twice while your new home has not yet been secured. The closing for the sale and the purchase of the new home must take place on the same day.
When the purchase comes first
This approach prioritizes purchasing the new home first. While it allows you to choose your new home more carefully, it also carries the risk of overlapping loans. As with the sale-first approach, the closing dates for the sale and the new home purchase must be the same day. Adding a replacement contingency clause can also help manage risk by allowing the purchase contract to be canceled if your current home cannot be sold within the specified period.
What Should You Watch Out for When Using a Home Replacement Loan?
Start looking for your next home early
Because the sale and purchase must be completed on the same day, it is essential to begin searching for your next home as early as possible. If the deadline arrives before you find the right property, you may be forced to compromise on your conditions.
Do not create an overly tight repayment plan
Home replacement loans generally carry higher interest rates than standard mortgages, and the repayment period also tends to be shorter. It is therefore essential to build a repayment plan with sufficient room, taking into account possible future increases in expenses such as caregiving costs and children's education expenses.
Confirm the closing-day schedule in advance
You need to complete arrangements with both the buyer and the seller of your new home within a single day, so the schedule on that day is very tight. Work with your real estate company to confirm the schedule in advance and prepare for potential issues.
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Frequently Asked Questions (FAQ)
What kind of interest rate can I expect on a home replacement loan?
It varies by bank, but it is generally higher than a standard mortgage, which typically has a floating rate of around 0.3% to 1%. In many cases, floating rates for home replacement loans are around 1% to 3%. Because the borrowing amount is large and includes the outstanding balance, even a small difference in interest rates can significantly affect repayment.
Are there alternatives if my home replacement loan application is denied?
If you can fully repay the remaining balance with the sale proceeds, you may be able to consider a new standard mortgage. Other options include products with different screening criteria, such as Flat 35, or reapplying after improving your repayment history.
Can a home replacement loan be used for moving into a rental property?
No, it cannot. A home replacement loan requires the purchase of a new home, so it does not apply to moving into a rental property or back to a family home.
