What happens to your mortgage when you sell?

Most Australians who sell their home don’t own the property outright. If you’re one of them and wondering what happens to your mortgage when you sell, read on.

HOW A MORTGAGE WORKS

When you take out a home loan, your lender places a mortgage on your property. This appears on the property title and means they have a formal interest in it. The mortgage also means they can sell your property to recoup the money they’ve lent you if you can’t pay them back.

When you sell and no longer own a property, the lender also loses its right to sell it. In exchange for this, they usually expect to be repaid the money they’ve lent you. When this happens, it’s called a discharge of mortgage.

ARRANGING A DISCHARGE OF MORTGAGE

When you sell your home, you’ll usually have to arrange for the mortgage to be discharged before settlement takes place. This involves completing and signing a formal discharge of mortgage form and providing it to your lender. The discharge process often takes up to two or three weeks, so it’s important that you arrange for it to happen as early as possible in the settlement period.

Once you’ve lodged your discharge of mortgage application, the lender will speak with your solicitor or conveyancer and arrange to be present at settlement. At that time, they’ll arrange to receive any money they’re owed from the proceeds of sale. The lender will then generally register the discharge of mortgage at the Land Titles office in your State or Territory to show they no longer hold an interest in the property.

There are often fees involved in discharging a mortgage, including a discharge fee and, if you have a fixed rate loan potentially break costs. Some lenders also charge a fee for paying off your home loan very early, say within the first three to five years. They’ll usually add these fees to the amount they take from your sale.

WHAT HAPPENS NEXT

The lender isn’t the only one who will take money from the proceeds of your sale. You’ll generally also have to pay any outstanding rates and utility fees, as well as fees to your solicitor or conveyancer and real estate agent. Any balance left over becomes yours.

If you’re not purchasing another property, that money will usually be transferred into your bank account. If you are purchasing another property, and you’ve arranged a simultaneous settlement, it will be paid towards the purchase price of your new property. You may also need to provide extra funds from a new home loan towards the purchase price, in which case your lender will place a mortgage over the new property and also take the certificate of title.

AN ALTERNATIVE: SUBSTITUTION OF SECURITY

You may not always have to pay out your home loan in full and then open a new one. Lenders will sometimes let you keep the same loan and swap the mortgage on your old property for a mortgage on the new one. This is known as substitution of security.

When this happens, you may have to increase the size of your loan or contribute extra funds. Alternatively, if you’re buying a cheaper property, you may receive some of the sale price back from your old home, or reduce the balance of your loan.

WHAT HAPPENS IF YOUR SALE DOESN’T COVER YOUR HOME LOAN? 

Owing more on your property than you sell it for is known as having negative equity. This sometimes happens when the property market softens, particularly if you borrowed with a high loan-to-value ratio (LVR) and haven’t held the property for long.

Because you’re liable for the full amount of your home loan, the lender will take steps to recoup its money before letting settlement proceed. This may include asking you to provide the shortfall from your own funds, potentially through the sale of some assets.

A mortgage insurer may also be asked to cover the shortfall, in which case they will then attempt to recover the money from you.

For this reason, it’s always best to do what you can to avoid selling for less than you owe. 

REMEMBER…

Enlist the expertise of an experienced solicitor or conveyancer to oversee your property transactions. That way, the selling process is more likely to run smoothly.

 

 

Source: realestate.com.au