Most people who sell their home haven’t completely paid off their mortgage.
In fact, two-thirds of Australians sell their home with an outstanding mortgage balance. So what happens to your home loan when you sell?
Well, the answer to that depends on whether you sell your home for greater than, or less than the value of your mortgage.
When you sell your house for more than value of your mortgage
The majority of people won’t be forced to sell their house for less than the value of their mortgage, meaning most sellers will make a profit. For example, let’s say you sell your house for $500,000 and the outstanding amount left on your mortgage is $200,000. Once you have repaid the lender the outstanding $200,000 balance that would leave you with a tidy $300,000 return.
Firstly, you will need to arrange for the mortgage to be discharged. Discharging a mortgage means you’re removing it from the title to your property. Mortgage discharge has to be arranged to occur when settlement takes place. The process of arranging to discharge a mortgage can take up to three weeks, which is why it’s important to get this process going as soon as possible.
After you have arranged for the mortgage to be discharged, your lender will liaise with your conveyancer or solicitor to sort out the settlement, where they will arrange to receive whatever money they’re owed from the proceeds of the sale (in this example the $200,000) and hand over the discharge of mortgage in return.
Discharging a mortgage comes with fees, the biggest one being the discharge fee. If you have a fixed home loan rate, break costs could potentially apply as well. Your lender may also charge a fee if you’re paying off your home loan early (within the first three to five years). All these fees could take away from the return you make on the sale of your home.
When you’re selling your home, you also have to pay solicitor or conveyancer fees, as well as pay the real estate agent, which can take a bite out of the return you make. Once you’ve paid all these fees, whatever balance is left becomes yours - so that initial $300,000 return could now look more like $285,000 for example.
If you are purchasing another property, the remaining profit will be paid towards the purchase price of your new home. If you’re not buying another home, whatever profit you have made will then be transferred into your bank account.
When you sell your house for less than the value of your mortgage
If you owe more on your property than what you sell it for, it is known as having negative equity and it’s a position no one wants to be in. Unfortunately, some people do find themselves in this position if they have overleveraged themselves by borrowing with a high loan-to-value ratio (LVR) and they haven’t held the property for long enough to gain any equity. This situation can also happen if you bought your house at the top of the market and the property market falls, or if you overpaid or overcapitalised on the home.
In this situation, the lender will try and recoup the money they’re owed before allowing settlement to go ahead. The lender could ask you to make up for the shortfall from your own finances, by selling assets. If you have no assets and can’t immediately pay, the lender will ask the mortgage insurer if they can cover the shortfall, who will then attempt to recover the outstanding amount from you.
This is why it’s always best to try and avoid selling your house for a loss if you can.
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