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

Selling your home with a mortgage is very common, but might feel a bit nerve wracking the first time you do it.

You may have questions about how it all works and whether there are any costs involved, so let’s dive into the process of selling your home when you have a mortgage.

How to sell a property with a mortgage

Before you can sell your home, you need to organise for the mortgage to be discharged. Basically, you need to contact your lender and ask for a discharge of mortgage form. Some times you can download this from their website.

In most cases, there will be a process the lender will need to follow to get this done for you. The request should be seen to within two to three weeks, but sometimes, it can take a bit longer.

If you’re thinking about selling, getting the discharge paperwork out of the way quickly is pretty important. Otherwise, your home’s settlement may not be able to go through.

Once your home has sold

When your home settles, the ownership will be transferred into the name/s of the new owner/s. At this point, your lender will receive the money from the buyer to pay off the mortgage, and register the discharge with your state/territory’s Land Titles Office.

There are usually some fees involved in discharging your mortgage - such as a discharge fee or break costs - that can typically be deducted from the proceeds of the sale.

This means you won’t need to outlay any of the costs yourself, but will receive less from the sale of your home. These costs are in addition to the normal costs associated with selling your home such as legal fees, real estate agency commission, and more.

Related: Understanding buying a home before selling your current property

Fees involved in selling with a mortgage

There can be a number of fees involved when selling your property with a mortgage.

• Discharge fee: Charged by your lender to cover the costs of discharging the mortgage
• Break fee: This fee only applies if you have a fixed rate
• Conveyencer fees: Cost of transferring title of land to new owner
• Real estate fees: This includes commission, any advertising costs, or any other additional services through your real estate agent
• Rates and utilities: You also need to be up to date on any outstanding council rates or utility fees
• Documentation fee: Fee charged by your lender to prepare documents for settlement
• Settlement agency fees: A fee charged by your lender to have their agent attend your settlement, whether it be online or in person

How your home’s value affects selling

The process of selling your home with a mortgage is pretty much the same, but let’s quickly discuss the differences between selling for more than your mortgage's value and selling for less than your mortgage’s value.

Ideally, you want to sell your home for more than your value on the mortgage so that you end up making a profit. For example, if your home sells for $500,000 and your outstanding mortgage amount was $200,000, you’d make around $300,000 as a return (minus any of the above fees). This can be used to purchase another home or as a hefty deposit.

If you end up selling your property for less than your mortgage’s value, you’d have what’s called negative equity. You can end up in this situation if you over-leveraged yourself by borrowing a high loan-to-value ratio (LVR).

This can occur if you purchased your home at the peak of the market (for example, after a housing boom) and the property market falls, if you paid more than the property’s worth, overcapitalised on the home, or simply haven’t owned it long enough for the home’s equity to increase.

If you sell with negative equity, your lender will try to recoup the money they’re owed before allowing settlement to take place.

This could mean you have to make up for the shortfall from your own finance by digging into your savings, selling other assets, or some other way.

If you have no assets to sell and can’t pay the difference, your lender will ask the mortgage insurer to cover the shortfall, and then the insurer will attempt to recover the outstanding balance from you.

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