You bought a new home, locked in a home loan with a 30-year term, and somewhere along the road something has happened: it’s time to sell the house. So how exactly does the selling process work when you still have a mortgage hanging over your head? Let’s take a look.
Can I sell my house with a mortgage in Australia?
To answer the big question, you can absolutely sell your current home even if you have an unpaid loan balance on your existing mortgage. Legally, you can sell your house any time after settlement in the property sale, but this comes with a whole range of financial risks and is generally not advisable until some time has passed (allowing you to cover the fees that come with the home buying process, like conveyancer fees, valuation fees, stamp duty, and more).
Whether you’ve outgrown the house, the property market has changed, or you think you can make a profit, there are many reasons that homeowners might want to look for a new property before they’ve finished paying off their old home. But how does that work?
How do I sell my house with a home loan?
If you still have money on your owing on your home loan, there are a couple of methods to selling your house while still on a home loan: a mortgage discharge and loan portability. The better method for you will depend on your financial situation and whether or not you’ve lined up a new mortgage for your next home.
What is a mortgage discharge?
A mortgage discharge is an official breaking of your mortgage with your current lender, allowing you to take out a new home loan with a new lender.
To arrange to be discharged from your mortgage, you must contact your lender and request your discharge. They will issue you a Discharge of Mortgage form, which you’ll submit to your lender. The lender will register this with the Land Titles Office.
In turn, you’ll receive a statement of your remaining loan amount, discharge fees and break costs. As a disclaimer, a mortgage discharge tends to operate similarly to paying off your mortgage early and can come with a range of break fees (there may be additional break fees for breaking a fixed-rate loan, for example).
Discharge of a mortgage can take several weeks, so this is not a process you’ll want to be rushing.
Once you receive payment from the new homeowner, your lender will take the amount they are owed from the sale price. The certificate of title can then be transferred to the new owner, free from any existing legal ties.
With the property title transferred, you can move into temporary accommodation while you look for a new home, look at a new home with a new lender (similar to refinancing for a lower rate), buy the property outright, or look into other options that suit your financial situation.
What is loan portability?
If you are looking to move your mortgage over to a new property, this is called home loan portability.
This could be a simpler option as it does not involve closing out your mortgage with one lender and starting up with another, instead keeping your lender and home loan details the same. You may be interested in this if you are on a particularly competitive low-interest rate home loan or a fixed rate where break fees are not worth it. Your lender may prefer this option as it keeps your business with them — and you could be rewarded with a lower interest rate in exchange.
You may be required to line up the settlement date of your new home purchase with the close of the property sale, which can be a bit tricky, especially if there are delays in processing any documentation or fees on the part of the lender, bank, conveyancers or real estate agents.
Bridging loans: Buying a new home without selling your old home first
With so much of your equity caught up in your home loan and repayments, actually paying the deposit on a new home can be difficult with an existing mortgage — and that’s where a bridging loan comes in.
Bridging loans are short-term loans used to help fill the shortfall of financing that occurs when you want to buy a new property before you’ve sold your first home. You might do this if your perfect home comes onto the property market before you’ve sold your current home or if you don’t want to worry about finding accommodation between homes (particularly with the Australian rental market being so competitive).
You must provide evidence of your financial situation for a bridging loan. This could include a statement of your loan-to-value ratio (LVR) for your current home loan to demonstrate your equity, and some lenders may require a contract of sale from your current property.
Bridging loans generally have higher interest rates than standard home loans and must be repaid within 12 months. They can also come with fees — check the comparison rate for a more accurate reflection of the interest rate you will pay once fees are factored in.
While a bridging loan will mean you can move directly into your new home once you’ve sold your old home, there are some things to keep in mind:
- You will need to pay off both your bridging loan and repayments on your current mortgage. If you do not sell your current home within the one-year term of the bridging loan, you will then need to pay two mortgages.
- You may have to sell your property for a lower purchase price than anticipated to sell it within the time frame.
- You may need to bid high on a new home to convince the owner to hold it while you settle up the bridging loan.
What happens if I owe more on my home loan than my current property value?
Owing more on your home loan than your property is currently valued at is called having negative equity and can be caused by drops in the property market or by overpaying for property and not waiting for equity to build up (amongst other things).
The reason this is a problem is that your final sale price won’t be enough to pay for your remaining mortgage, especially factoring in any discharge fees and agent fees required.
Since you will need to pay off the remainder of your mortgage, your lender may request that you draw down on your savings account, sell other assets, and provide bank statements to show evidence of your financial situation. It’s important to inform your lender of any financial hardship beforehand to help avoid this situation.
Mortgage insurers may get involved if you cannot come up with the money to pay off your home loan, paying out any shortfall to the lender after the property sale. This is why low deposit loans (with an LVR below 80%) will require you to pay Lender’s Mortgage Insurance.