You’ve decided to cash out of the property market, upgrade, or build your dream home. What happens if you have a current home loan on your property?
We all dream about being mortgage-free, but in reality, it takes most of us a very long time to pay off a home loan.
So, how do you sell your house when technically you co-own it with the bank? While it may sound tricky, it is surprisingly simple to navigate. Even with a mortgage, you can still sell a home and allow yourself to upgrade, downsize or leave the market altogether.
It is important to understand your obligations to your lender, what fees to expect and the time needed to complete a transaction.
Can I sell my house while paying a mortgage?
Australians are holding onto their homes longer than ever, however, it is still considerably shorter than the typical 25 or 30 year principal and interest home loan.
The latest CoreLogic figures show that, nationally, the average length of ownership is just over 11 years for houses and nine and a half years for units. So, selling a home with a mortgage is common.
It is a good idea to talk to your lender – or even better an independent lending specialist – if you are planning on selling your property. A lender can only take you through their rules however a lending specialist has many more options. They can discuss with you the possibility of a security substitution and help you with a budget around the selling and buying costs. Why not at the same time take up a free review and make sure you have the best home loan for you!
The reason you cannot sell your home without your lender being involved is that they hold what is known as the ‘Certificate of Title’ on your home. In other words, they have a formal interest in it. This gives them authority to sell the property if you default on your repayments. It also means they want to be paid back in full when you decide to move.
How does selling a house with a mortgage work?
If you’ve chosen to work with a lending specialist, they will do most of the hard work for you and help you fill in any forms. They will also help keep the whole process on track – important if you’re selling and buying!
The first step is to fill in a Discharge of Mortgage form for your current lender. It will ask for details such as:
- borrowers name
- guarantor name
- lending specialist name
- solicitor’s name
- home loan account numbers
Be sure to read all the information and understand it before it is lodged as it gives the bank authority to start the process.
Remember it can take between 14 and 21 days for a mortgage to be discharged, so it is important to factor this into your timeline. You will still be responsible for making mortgage repayments right up until the sale is finalised.
Obtaining a settlement or closing statement is also a good tip, as it outlines the closing costs and can give you an idea of any profit.
Your bank will arrange with your lending specialist and solicitor or conveyancer for the outstanding amount on your mortgage to be paid at settlement – this will be taken out of the proceeds of your sale price.
Your lender will also register the discharge of the mortgage with the Land Titles Office in your State or Territory. This means that property is free of any ‘encumbrance’, which is a legal term referring to restrictions that may prevent a sale. Discharge fees can range from $0 to $550.
Can you keep your existing mortgage and move to a new property?
The good news is moving house doesn’t have to mean moving banks. But we do recommend you do a review to avoid paying unnecessary interest and fees.
Home loans have ‘portability’, meaning they can simply be transferred onto the next property.
If you stay with your current home loan, you’ll need what is known as a ‘substitution of security’. This removes the mortgage from your current property and carries it over to the new home.
What happens if I sell my house for less than the mortgage?
Australian home owners have benefited from booming prices in recent years, but the property market doesn’t always keep rising.
While it’s uncommon for the outstanding balance on a mortgage to be higher than the value of a home, it does happen. Purchasing at the top of the housing cycle, heavily redrawing on your home loan, paying too much for a property or securing a property with a low deposit can put you at risk of what is known as having ‘negative equity’.
Brand new homes and apartments are often also at risk because they tend to sell for a premium.
Any shortfall in paying off your mortgage on settlement will need to be made up from personal savings or selling assets, such as a car. If you cannot make up the difference, your lender will ask your mortgage insurer to cover the difference. They will then try to recoup the outstanding debt from you.
This is where it’s really important to have an independent lending specialist on your side as they will help you navigate what can be a stressful situation.
Can I buy another property before selling my existing home?
As most of your equity will be tied up in your current home, it can be tricky to buy another property before selling. There are a number of options that can make it possible but can depend on market conditions. The main ones include:
- Contingent offer – you agree to buy a home on the condition that you are unable to settle until your current home has sold. Sellers, however, are less likely to want to go for this option.
- Bridging loan – this is an additional short-term loan taken on top of your existing mortgage. It gives an additional six to 12 months to sell your property. It comprises your existing home loan, the purchase price of new property and associated costs such as stamp duty, legal costs and lenders fees. It can be riskier in a falling market.
What other fees should you factor in?
On top of potential lender fees, you will also set aside funds to pay for conveyancing, marketing and agents fee or commission. Be sure to budget around $800 to $2000 to cover the legal costs of the sale, which is handled by a conveyancer or solicitor. Costs vary depending on which states and territories you reside in.
Your real estate agents may ask for a flat fee or operate off a tiered commission. These methods will be discussed and agreed upon before any contracts are signed.
Your agent is also in the best position to advise on a marketing budget. Campaigns are based on where you live, type of dwelling and market performance. It often includes both digital and printed media. It may cover:
- digital brochures
- real estate portal listings
- social media posts
- professional photography
- drone footage
Whether you have a mortgage or not, the most important step in listing your property for sale is to know just how much it is worth.
This is where a good agent or your lending specialist can help. LJ Hooker Home Loans lending specialists can link you with a strong local agent, and even provide you with free property and suburb reports. The free property report can be tailored to your actual property being sold.
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Hopefully our information has put your mind at ease. No need to stress but understanding the steps and your options not only allow you to save money – but to also stay in control.
Speak with one of our lending specialists. We’re available online, phone, or in person.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.