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What happens to your home loan when you sell?

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Life has changed and you need to move on – whether that’s upsizing, downsizing or relocating to a new area. But what happens to your mortgage when it’s not fully paid off and you want to sell?

You need to arrange a mortgage discharge before you can sell

If your home is still mortgaged, the lender needs the loan repaid. Lenders usually recoup the money from the proceeds of the sale. But before you can sell your property, you will have to arrange a mortgage discharge with your lender. Once this is done, your loan contract ends and you can proceed with selling your property.

Most lenders charge a discharge fee, also called a termination or settlement fee. Fees differ per lender and per state, but it can be anything from $150 to $500. If you have a fixed-rate home loan, it’s likely you will also have to pay a break fee (which can be higher).

The process typically takes two weeks, but we suggest applying for a mortgage discharge three to four weeks ahead of the settlement date to avoid possible delays.

What happens if the sale doesn’t cover your outstanding home loan?

When the sale of a property amounts to less than the outstanding mortgage, this is called negative equity. You can decide to wait a few more years to acquire more equity before selling. Refinancing your home loan at a lower interest rate could help you pay down your loan and gain equity faster.

If waiting isn’t an option, you will need to discuss your situation with the lender and request approval to proceed with the sale of the property. If you have any savings or an asset you can sell to help cover the shortfall, this may help your case. The lender may also request a valuation to see if the property is priced in line with the market value. Perhaps your selling price is too low.

If there is no way to cover the shortfall, the lender may approach a mortgage insurer to recover the balance of the loan when the sale goes through. If the mortgage insurer agrees, you can go ahead with the sale. The mortgage insurer will then make an arrangement with you to repay the funds owed to them.

What if you sell your property after buying a new one?

Before putting your home on the market, you may be debating whether to sell your existing home before buying the next one, or do it the other way around. Each scenario comes with pros and cons.

Buying a new property first

If you buy a new home before selling your current one, you won’t have any equity from a sale to put towards your new property.

If, however, you are in a strong financial position and can hold two properties simultaneously (at least for the short-term), this won’t be an issue. With no pressure to sell immediately, you can wait for the best offer to come your way on your current property.

Selling your current property first

If you sell your current property first, you’ll be in a better position when entering the market, knowing exactly what your budget is and if you will need a new loan to cover any shortfall.

The downside is timing the two transactions. If you haven’t found a new home by the time you sell, you may have rent and/or storage costs for several months until you find another property, which can become costly.

When selling your existing home to buy a new one, try to negotiate a better deal on a loan with your current lender or switch to a lender that offers a lower home loan rate. You can use our handy loan calculator to compare loans.

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