What happens when you sell a property with a home loan

It is common for properties to be up for sale despite having a mortgage that is not completely paid off. Some homeowners have to do this because they need to upsize, move to a smaller home, or relocate to a new city.

What happens when you sell a property with a home loan?

When you sell a property that is fully paid and has no outstanding loan, all proceeds from the sale will go to the seller. Selling it with a loan entails a different process.

There are several important things to consider before you hit the market. You need to know how much is left on your loan, the current interest rate, if you have made extra payments, and whether you’ll buy a new property.

You may be wondering how the sale will affect your home loan or what the process will be — but one thing is sure: the lender needs to be paid off in one way or another.

Settle your loan before selling

A lender registers a formal interest on your property when you take out a mortgage, which is recorded on the title of the property. The moment you fail to make continuous payments, they sell the property in order to recoup their losses.

That’s why when you sell a property that still has a home loan, you have to repay it in full since the lender won’t be able to use your property to regain their funds.

There are two ways you can settle your loan, one of which is by paying the full amount of the loan on sale of the house, or conducting a simultaneous settlement.

The process may take a while, so it’s important to get this out of your way first so that your settlement will go smoothly. Here’s how to discharge your mortgage:

1. Fill out and sign a mortgage discharge form, submitted to your lender through a solicitor or conveyancer to let them know of your intention to repay the loan.
2. It takes 2–4 weeks for lenders to process your request, which involves discussions with your solicitor or conveyancer to organise the settlement.
3. Your lender will register the discharge of mortgage at the Land Titles office to show that they no longer hold any interest in the property.

The downside of going through this process is that it can be expensive. It will all depend on the remaining balance of your mortgage. There are additional fees that you will need to pay on top of the final amount that the lender will state on your settlement.

Another option that you can do is undergo a sales settlement. This move might be tricky, but it will give you peace of mind knowing that you don’t have to worry about making mortgage repayments on two properties.

To pull this off, you sell your old property and buy a new one at the same time. Using the funds from the sale, you pay off the mortgage and use the remaining money to buy a new property.

While it is a straightforward process, it can become complicated because it heavily depends on the timing of the settlement and transaction. It is best to consult with a solicitor or conveyancer who will make sure all the transactions go smoothly.

After going through all that, you’ll be free from any obligations with your lender. You’ll be able to move forward with the sale of the property, or apply for another mortgage to finance another property you’ll move into.

Make use of your loan’s portability

Home loan portability allows you to transfer your current home loan to finance another property. It is an add-on feature offered by some lenders, and it’s perfect for individuals who do not see themselves living in the same home for many years.

It makes your life easier since you don’t have to worry about closing your current loan and applying for a new one as you buy another property. You’ll be able to have the same loan features and loan structure, as well as the remaining loan balance and interest rate from your initial loan.

This also allows you to completely refinance the loan or renegotiate to a lower interest rate. So make sure you check the terms and conditions of your existing loan as it may have this feature that will save you a lot of time and money.

Take out a bridging loan

A bridging loan is a temporary loan used to finance the cost of buying a new property as you’re selling your existing home.

It’s a convenient way to secure a new property you want to buy while waiting for your current home to be sold. It also gives you more time to sell your home and settle down in your new place.

The disadvantage of having a bridging loan is that you’ll have more loans to pay for while you settle the existing one. It will typically require 40% equity and charges a higher interest rate.

Since it is temporary, a bridging loan will have a shorter term for repayments which is around 6–12 months. The longer it takes for you to sell your property, the longer you’ll be charged.

Factors to keep in mind

Negative Equity

It’s important to note that you might not be able to sell the property at a profit. This is called negative equity, which occurs when the property market softens and you have a loan with a high loan-to-value ratio (LVR).

Since you’re obligated to pay for the full amount of the loan, despite being higher than the value of the property, your lender may do what they can to recoup their cost.

If the sale of the property won’t be able to cover the remaining balance of the loan, you won’t be able to undertake simultaneous selling, pay the difference out of pocket, and may be forced to take a bridging loan.

The best thing you can do for this situation is to avoid selling at a loss, continue the repayments, and wait for the market to bounce back.

Timeline

Generally, selling a home takes a while. There’s so much paperwork involved and processes to follow — from the transaction itself to the transfer of ownership. It is important to be mindful of how long a certain stage of the sale will take.

Set a game plan to avoid any setbacks as you go through the settlement so that it won’t affect the sale of the property. Let’s say you have a potential buyer already, but the lender is still going through the mortgage discharge. You don’t want to lose a buyer because of this.

Know what you want to prioritise. Is it selling your existing property, settling your current mortgage, or buying a new home? Also, consider how long the finance aspect of the transaction will take since it will heavily determine how you move forward.

If you still have a significant amount to pay on your mortgage, consider if you need to immediately sell the property to pay it off. If you’re almost done with the loan, then you can get started on the settlement or apply for a bridging loan while looking for a new property to buy.

Timing is essential, as it can greatly affect the things you have to pay for and the paperwork you have to do.

Cost

Aside from the current loan you have, there can be several fees involved when you sell a property with a mortgage.

• A discharge fee is charged by the lender to cover the costs of discharging the mortgage
• Break fee only applies to those with a fixed rate on their mortgage
• Conveyancer fees are the cost of transferring the property title to a new owner
• Real estate fees, which include commission, any advertising costs, or any other additional services through your real estate agent
• Rates and utilities must be up to date on any outstanding council rates or utility fees
• A documentation fee is charged by the lender to prepare documents for settlement
• Settlement agency fees are charged by a lender to have their agent attend your settlement, whether it be online or in person

All of these fees are necessary and may affect your capacity to buy a new property — so, before doing anything, be prepared to pay all of these on top of the mortgage you currently have.

Conclusion

It is best to discuss with a professional any plans you have with your property that has an ongoing loan repayment. This will help you avoid making missteps and reduce any unnecessary stress from all the things you need to process.

At the end of the day, selling your property with a home loan is not as simple as it sounds. You will need to be aware of all the risks and possible consequences that can arise.

Have an open conversation with your solicitor, conveyancer, or broker on anything that may affect the sale so that they can give you the best advice on the next steps you need to take.