What happens to your mortgage loan when you sell a house?
Selling and moving houses whilst the mortgage is not yet fully paid off is common among homeowners, as not everyone owns their home outright. A lot can happen within the repayment period of standard home mortgage loans, which often have a term of up to 20 to 30 years. You may need to upsize, downsize or relocate for work. You may have additional kids or become empty nesters, requiring more or less space. Or simply, your current house may not be the right one for you.
So, what happens to your mortgage loan when you decide to sell your house? What impact does it make? If you’re one of the many Australians who are wondering about this, read on.
How a mortgage works
When you get a mortgage, your lender puts a ‘mortgage’ on your house or property. This means they have a formal interest in it. You’re entitled to keep your mortgage if you continue to make payments, as scheduled. Though, if you fail to make your mortgage repayments and can’t pay them back, the lender can insist you sell your property so they can recover the money they’ve let you borrow.
When you sell your property, your lender no longer has the right to sell it, but they expect you to repay the money you’ve borrowed.
What is the process of selling your house before paying off the mortgage?
Arranging a mortgage discharge is important if you plan to sell your house. Before settlement, you must be able to get your mortgage discharged to avoid delays in settlement. Any existing mortgage loan will be registered on the certificate of title as an encumbrance. This will then limit your capacity to transfer the title of your property.
Getting a mortgage discharge usually takes around two to three weeks. The process involves filing a formal discharge of mortgage. Once this has been lodged, your existing lender will speak with your conveyancer or solicitor to sort out the settlement. The land title office in your state or territory will then be informed about the discharge by the lender. They will then register the mortgage discharge to indicate that they no longer hold an interest in your property.
What are some scenarios when selling your house with a mortgage?
Negative equity refers to a situation when you sell your house at a value that’s below your home loan balance. This occurs when house prices in the market are dropping. If you happen to sell whilst your house is in negative equity, you’ll still need to pay back the shortfall and be required to make your mortgage repayments at the same rate.
Here are some areas to consider to help avoid or reduce negative equity before you sell your house:
- Make renovations and improvements to increase the property value
- Make additional home loan repayments
- Understand your equity by getting a professional valuation
- Do property research
Getting a bridging loan
Selling your house first usually provides the necessary funds to purchase your new one. Or in other words, you’ll get the payout from selling your old house and then use it to make the down payment or purchase your new house. Alternatively, if you have considerable equity in your house and a stable income, buying your new house before you sell your existing home may be an option.
What about if you buy first, but you don’t have enough funds to cover the down payments and other costs for the new home? In this scenario, a bridging loan could be worthwhile considering.
A bridging loan is a short-term or temporary loan that allows you to borrow money and make your down payment for your new home, as well as pay off your old mortgage. Many private lenders, specialist lenders and fintechs offer this type of loan. You can take out a bridging loan whilst waiting for the proceeds from the sale of your old home to become available. Once you get the funds from the sale, you can use them to pay off the bridging loan.
What are the costs of selling your house with a mortgage?
Selling your house with a mortgage may include the following costs:
- Discharge request fee. This is charged to end your contract with your lender.
- Break fee. You may need to pay a break fee if you have a fixed rate home loan. The break fee amount depends on how much money you still owe to your lender and how long is left in the fixed term.
- Conveyancing fee
- Real estate agent fee
Can you keep your mortgage after you sell your house?
If you sell your house that is on the mortgage, the earnings from the sale will be used to pay the loan off. So, no, you can’t keep your mortgage after you sell your house. However, if you sell your house and immediately buy another, you may be able to transfer your mortgage (meaning may be able to switch your old or existing mortgage loan to your new house).
Selling a house before paying off the mortgage is possible, but you will need to arrange for a mortgage discharge to do so. Before you look for someone to buy your house, it’s essential to make sure you’re up to date with your mortgage payments, and you can cover all costs that go along with selling a house. A mortgage broker or an accountant can also help you understand your options and support you in making the right decisions.