How to Sell a House with a Mortgage
Selling your home while it’s still under a mortgage is more common than you might think. It may feel a bit nerve-wracking the first time you do it, but there’s nothing a bit of research won’t fix.
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.
What do you need to do when selling a house still under a mortgage?
There are a few ways you can go about selling your home while it’s still under a mortgage. But generally, you need to be discharged from your current home loan before you’re allowed to sell the property.
You need to contact your lender and ask for a discharge of mortgage form. Some lenders have the form available to download on their website. The lender will process the mortgage discharge upon receipt of the request. The process can take two to three weeks or even longer, depending on the lender’s discharge process and other requirements, such as your property settlement date.
It’s best to get the discharge paperwork out of the way quickly. Otherwise, the settlement of your home sale may not go through on time.
What happens after you sell a home with a mortgage?
After the settlement (i.e., you’ve finalised the sale of your property), the ownership is transferred to the new owner. At this point, your lender will receive the money from the buyer to pay off the existing mortgage and register the discharge with your state/territory’s Land Titles Office.
There are usually 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.
You typically won’t need to outlay any of the costs yourself, but you 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.
Fees involved in selling with a mortgage
There can be several expenses involved when selling your property with a mortgage, such as:
- 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.
- Conveyancer fees: The cost of transferring the title of land to the 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: A 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.
Home values and how they affect home sales
The process of selling your home with a mortgage is pretty much the same. Ideally, you want to sell for more than the value of the mortgage.
If you end up selling your property for less than its mortgage’s value, you’d have what’s called negative equity. You can end up in this situation if you over-leverage yourself by borrowing a high loan-to-value ratio (LVR).
If you sell with negative equity, your lender will try to recoup the money they’re owed before allowing settlement to take place. You may have to make up for the shortfall from your finances by digging into your savings, selling other assets, or some other way.
Selling your house while keeping your existing mortgage
It is possible to keep your current mortgage and move it to the next property you will purchase. You’d need something called ‘loan portability’. This is a feature some loans have, allowing borrowers to substitute the security of their home loan for another property.
This could be a good alternative for those who don’t want to go through the whole application process again. It can also save on break and discharge fees. However, it may not be feasible for those who want to buy a home with a higher value than their current loan limit.
Selling a house and buying a property at the same time
If you want to sell your home and buy a new one simultaneously, you may want to look into a bridging loan. This type of finance helps borrowers purchase a second home while they’re in the process of selling their current one. No need to wait until your current house is sold.
The lender of the bridging loan will take over your existing debt and give you the funds you need to buy your new home. Your bridging loan will consist of your previous debt (from the old lender) and the new debt from your new property purchase.
When you’ve sold your previous property, the proceeds from that sale will go into reducing your bridging loan debt. After the sale and settlement, your bridging loan will turn into a typical home loan, which you’ll start paying off. If you are unsure what selling means for you, you should speak to your property expert or financial advisor.
Want to learn more about bridging loans and how they can help you? Get in touch with our friendly lending specialists. Call 1300 712 070 or see if you qualify for a loan by applying online!
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