Similar to Portability, however instead of porting the debt to a different property you can keep the debt with cash being used as the security in the form of a term deposit.
This avoids the break fees, if the loan is fixed.
A little known and under used strategy is to maintain debt in the event of a sale of a property or reduction of value of a property is the Term Deposit Substitute Strategy.
When considering secured debt, we must always remember the lender simply needs a security and income to maintain a debt.
In the event that a client wishes to release a property that has been used as security against a debt, the lender will simply require another security to be put in place to maintain the debt. In this strategy, the security is a term deposit.
An event could be the sale of a property, gifting a property, releasing a property title back to the owner or refinancing a property to another lender.
If a client has another property to substitute in as security then the Portability Strategy could be employed instead of a Term Deposit
This strategy is particularly powerful when a client has a fixed debt on a property with a large break cost.
If the client sells the property and release the security to another party this will break the fix debt and the client would be charged the large break cost. This break cost can be avoided with the Term Deposit Substitute strategy.
If you sell your home for $500,000 Property Sale , however you have a $400,000 Fixed Rate loan.
At the time of settlement the property is released to the purchaser from the lender and the purchaser pays the Vendor solicitor $500,000. Like a standard sale.
The $500,000 is then disbursed as follows:
$500,000 to the lender to establish a Term Deposit to act as security for the $400,000 Loan, with no need to break the fixed rate nor break fee is charged.
Once the fixed rates term expires the remaining cash is released from the term deposit..
The Term Deposit will earn an interest during the time it is used as security instead of offsetting the interest of the debt.
The Term Deposit also incurs an upfront and ongoing fee while it is in place.
Of course, this strategy only makes sense if the break cost of the original loan, is greater than the cost of the term deposit.
Only a few lenders offer this strategy.