Two-thirds of homeowners sell their property while it has a mortgage, so it’s likely that you’ll decide to sell before your home is paid off in full. But how is the house selling process affected when you make a sale, but you still have repayments to make?
Let’s look at how a mortgage works and what happens to it when you sell your house.
How a mortgage works
When you take out a home loan, the mortgage appears on the property title and means that your lender has a formal interest in the property. It also means your lender can sell the property to recoup the money they’ve lent you if you can’t make repayments on your home loan.
When you sell your property, your lender loses their right to sell it and recoup their capital. As such, the onus is on you to repay the value of the home loan minus what you’ve already paid back. The process of repaying a lender when you sell a property is called a ‘discharge of mortgage’.
There are two scenarios for selling a house with a mortgage:
1. Selling a house for less than the value of the mortgage
When you sell your house at below the value of your outstanding mortgage, this is known as negative equity. It’s a risk when house prices are dropping – if you bought a house at the top of the cycle and are in a position where you are required to sell it at less than the value, you’ll still need to make repayments at the same rate. To avoid this scenario, do your property research and make sure that any loans have a lower loan-to-value ratio of 90% to reduce the risk of not being able to repay the mortgage and being forced to sell at less than the mortgage value.
2. Selling a house for more than the value of the mortgage
Selling your house above the value of your outstanding mortgage is known as selling with positive equity. If you sell with positive equity, you keep the money made off the sale of the property minus the value of the outstanding mortgage and any selling costs incurred.
Steps for selling a property with a mortgage
When you sell your home, you’ll typically have to arrange for the mortgage to be discharged with your lender before settlement takes place.
Here are the steps for discharging a mortgage:
- Submit a discharge form to your lender via your solicitor or conveyancer to notify your lender that you’re repaying the loan, around one month before the settlement day in your contract.
- Your lender should take 2-4 weeks to process the discharge request. This involves speaking with your solicitor or conveyancer and arranging to be present at settlement. At that time, they’ll arrange to receive any money they’re owed from the proceeds of sale.
- Your lender will register the discharge of mortgage at the Land Titles office in your state or territory to show they no longer hold an interest in the property.
- If you’re applying for a new home loan from the same lender, it’s a good idea to submit your new mortgage application at the same time to streamline the process.
- It’s a relatively straightforward process, but it’s a good idea to leave plenty of time for your lender to process your application so that you can be reassured that everything will be sorted by the time settlement day rolls around.
What are the costs of selling your house with a mortgage?
Don’t forget that part of the cost of selling your home will be incurred when you sell with a mortgage. These include:
- Discharge request fee – Most lenders will charge between $250 and $500 to process your form.
- Break fees – If you have a fixed rate home loan, you will likely have to pay a break fee in order to pay off the full amount you owe early. The fee will be calculated by the bank according to the difference between the wholesale rates (the amount at which they borrowed money from the wholesale money market) between the time at which you applied for your mortgage and the time at which you repay your loan. They then multiply that figure by the loan amount and by the remaining term of the loan. Depending on the length of your mortgage and the amount of the loan remaining, you should be prepared to pay a good chunk of cash.
- Conveyancing fees – Don’t forget to factor the conveyancer into the cost of selling a property since they take care of the paperwork when the exchange takes place.
What happens when you sell your house with no mortgage?
For those who have been able to pay off their mortgage entirely, selling a house means that the entire sum of the value of the property comes directly to you on settlement day. For downsizers, this often means that their next house can be bought without a loan and that they’ll have some extra equity to play with. This is a strategy used by many retirees to bulk up their retirement funds.
Banks and other lenders don’t incentivise paying off your mortgage early since their business relies on the interest you pay on the loan. That means selling a property with a big chunk of its cost still owed can be very expensive. However, there are other areas that you can save on when it comes to selling your property, including your agent’s fees, which can offset the costs of breaking your mortgage, freeing you up to sell your home whenever you choose.
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