If you’re considering selling your home and still have a mortgage, you likely have some questions about how it will work. What happens if you sell your home for more than you owe? Or if it sells for less? How do you pay out your loan? And who can help you deal with the bank and navigate the paperwork?
These are all common questions for those who are selling a mortgaged property for the first time. Like many financial and legal contracts and requirements, the process can quickly make your head spin if it’s not your area of expertise.
There are lots of variables to consider, which can make selling a house still under mortgage a little daunting. But the good news is that when you have a clear idea of how the process works, and who you can turn to for help, you can deal with any of the different scenarios that might play out and be confident your sale will go smoothly.
So, to help you understand exactly what is involved in selling your house and paying off your mortgage, we’ve put together this guide outlining the steps and variables that you need to know about.
How to Sell Your House with a Mortgage Owing
Selling a house before the mortgage is paid in full is not unusual. Recent statistics suggest that just over a third of Australians who have purchased their own home own it outright. This means that a fair chunk of the home owners that put their property on the market owe at least some money on their loan. If you have a mortgage and sell your home your loan will need to be paid out so the contract ends, and the mortgage can be discharged. The discharge of mortgage will remove the home loan from your property so you can proceed with the sale without unnecessary delays.
To make this happen you’ll first need to complete and submit a mortgage discharge form. Although they can use different names for the authority (e.g. discharge and variation authority or request to vary security, most of the banks follow a similar process. Here’s a brief overview:
- Get yourself a copy: Download and print the mortgage discharge form online by visiting your bank’s website or drop into a branch and pick one up.
- Complete the form: To avoid issues with processing, it’s essential that all parts of the mortgage discharge form are filled in accurately and that nothing has been missed. If you are not sure about anything, contact your conveyancer for advice. Alternatively, you could make an appointment with your lender and have them guide you through the steps too.
- Return the form: Once you’ve filled everything in, return it to your lender as soon as possible. You want to make sure you allow enough time for them to process your request without delaying your settlement. A minimum of two weeks is usually enough time for the bank to finalise things at their end. However, to be on the safe side it’s best to aim to have your form submitted four weeks before settlement is due. You can either return the form yourself, or have your conveyancer handle it on your behalf.
- Apply for a new loan: If you are planning on sticking with the same lender to purchase your next home, applying for your new mortgage when you submit the discharge form is a good way to streamline the process.
What Are the Costs of Selling Your House with A Mortgage?
Before you go ahead, it’s a good idea to have a full understanding of the costs involved in selling a house still under mortgage. For example, most lenders will charge a discharge fee (also known as a settlement or termination fee) to end the contract. The amount can vary quite a bit, starting from as low as $150, with some banks charging as much as $500. You can find out the amount your lender charges on your home loan contract or by giving them a call.
If your mortgage is a fixed rate home loan, it’s likely you will also need to pay a break fee. The fee is calculated by the lender, based on how much you still owe and how long you have left to pay off your loan. They work out the difference between wholesale rates from the time you applied until the time you are ready to repay the loan in full, then multiply it by the amount you owe and the time remaining on the mortgage. The break fee can be quite a significant amount, so if the interest rate on your loan is fixed, it’s worth checking with the bank how much you’ll be charged so you can be prepared and allow for it.
Other potential costs to factor in when you sell are conveyancing fees (which can be a fixed charge or vary depending on the value of the property), real estate fees (this can be a fixed charge, however it is often a percentage of the sale price), portability fee (if you transfer your existing mortgage to your new home) and the cost of any repairs and renovations you choose to undertake to increase the value of your home (unless you partner with us, in which case we’ll take care of that for you).
Is It Possible to Transfer Your Mortgage to Your New Property?
If your mortgage has a portable loan feature, you may be able to switch your existing home loan to your new property. Your lender and interest rate will stay the same, and your mortgage will be transferred to your new home. For this to be possible, you will need to satisfy any requirements set out by your lender such as simultaneous settlement and a minimum value on the home you are purchasing.
You’ll likely be charged a portability fee, however, if your loan has a fixed rate and you’re in a situation where you would be required to pay a hefty break fee, transferring your mortgage could save you quite a bit in fees. You should also be sure that your loan offers the best rate and terms, as you may miss the chance to find a home loan that is better suited to your needs or offers a more competitive rate by sticking with what you currently have.
What Happens If You Sell Your House for More Than the Value of Your Mortgage?
If you’re selling a house still under mortgage, the ideal scenario is to sell it for more than you owe, so you can walk away with a nice lump sum. Depending on your plans, you can then put this towards the purchase of your new home, invest it, save it or splurge. But is it really that simple?
Yes and no. Of course, paying out your mortgage must be at the top of your list, and make sure to base the amount on the final payout figure (inclusive of fees) not the amount owing on your last statement. You’ll also need to pay for any of the other fees related to selling your home - but once that is covered, you are free to spend the surplus however you see fit.
What Happens When You Sell Your House for Less Than the Value of Mortgage?
In some cases, you may be forced to sell your home for less than you owe on your mortgage, which is known as negative equity. Maybe you’re a victim of bad timing, and you bought your home when property prices were at their peak and need to sell at a time when prices are at a low point in the cycle. Negative equity can also be an issue if you overpaid on your property, your home has been damaged and is not covered by insurance, or your loan-to-value ratio is high, and you are selling your home in the early years of your mortgage.
If you find yourself in this situation, and you must sell your home, you are still required to pay out the full amount owing on your mortgage. You will need to talk to your lender before proceeding with the sale to get their approval. Depending on your bank, you can expect some or all of the following to occur before they’ll allow the sale to proceed:
- Your lender may ask if you have any savings or other means to cover the gap
- They might request a statement of assets and liabilities to see if you have any assets that could reasonably be sold and put towards the shortfall
- They may look at your bank statements to check if there are any unusual spending habits that require further explanation
- They will organise an independent valuation to find out if the property price is reflective of market value
- They’ll also investigate the details of the sale to be sure it was managed by an authorised agent and there are no family members or other related parties involved.
If there is no way found to cover the shortfall, the next step is for the lender to send an application summary to their mortgage insurer asking for approval of the sale. Once approval is granted, the sale can go ahead. The mortgage insurer will pay out the shortfall to the lender on settlement to finalise the loan. From there, the mortgage insurer will look to make an arrangement directly with you to recover the funds owing.
What Are the Alternatives to Negative Equity?
If you are in a situation where you could be facing a negative equity home loan, it’s obviously not ideal. Depending on your circumstances there may be other options you could explore. If you are in a position where you can hold off on the sale, making extra repayments where possible will reduce the shortfall – a mortgage repayment calculator can be useful here to help you do the sums. You may also consider refinancing or negotiating a more competitive interest rate, or if you are experiencing short-term financial troubles, ask your lender about hardship arrangements or a repayment holiday.
If the negative equity is largely due to a downturn in the market, you may decide to hold off on the sale until things pick up again. However, you’ll need to consider this carefully to make sure you avoid further losses. In this case it can be helpful to speak to a real estate agent to get their thoughts on the current market and where it is heading.
You could also look to increase the value of your property by renovating. Again, speaking to a real estate agent can help you identify where your money is best spent for maximum return. If you are in a situation where finding the funds is difficult, you may need to think outside the box. Partnering with Sellable could be an ideal solution, as we offer a guaranteed price on the sale of your home, will organise and pay for improvements, and then share the upside.
Sell Your Mortgaged Property with Confidence
Selling your house and paying off your mortgage doesn’t need to be stressful. When you arm yourself with the knowledge you need to understand the process and obstacles you may encounter, you set yourself up for success.
Would you like to know how you can sell your home for a guaranteed price, have your renovations paid for and share in the upside if your home sells for more? Get in touch with our team to find out more today.