A “Home Owner” in Australia isn’t necessarily someone who doesn’t have a mortgage, you’re still a home owner, but you have a mortgage right? Well, if that’s you and you’re considering selling your home (or even your investment property), let’s shine some light on what happens to your mortgage when you sell …
The nuts and bolts of a mortgage
A mortgage is essentially the money you’re lent to purchase a property (but you knew that), this appears on the property title and means the lender has a formal interest in the property. It also means that if you are unable to pay the money back (default), then the lender has the right to sell your property to recoup the money they’d lent you.
It stands to reason then that if you sell and no longer own that property, the lender also loses its right to sell it. This doesn’t mean you no longer owe the lender the money though, and it most commonly results in what’s called a “discharge of mortgage”, where the lender expects to be repaid the amount outstanding on the loan. Obviously they have no right to any money made on the property, just what’s outstanding on your mortgage.
Discharge of mortgage
In most normal circumstances, you’ll be required to arrange for the mortgage to be discharged before settlement takes place. The process involves submitting a formal discharge of mortgage form to your lender, who then may take up to three weeks to process it. For that reason it’s important to get this underway as early in the settlement period as possible
After that, your lender will arrange to be present at the settlement by way of your solicitor or conveyancer where they’ll arrange to receive the money owed to them from the proceeds of the sale. After that they’ll go ahead and tell the Land Titles office that they no longer hold any interest in the property.
It’s not usually cost-free. Usually there’s a discharge fee (kind of like an early payout thing), and normally with fixed rate loans there’ll be “break costs”. These fees vary with the lender, but also keep in mind that many will request payment of an additional fee if you pay your home loan off very early – usually within the first five years. Fees like these are added to the amount taken from the sale of your property (not upfront costs).
What are the alternatives?
There’s what’s called “substitution of security”. Taking this path is when your lender lets you keep the same loan and swap the mortgage on your old property for a mortgage on whatever property you choose to purchase using those funds.
There may be more funds required, which would involve increasing your mortgage or throwing more of your own money at it. Alternatively, if there’s money left, you’ll receive that into your bank account, or you can use it to further reduce the balance of your loan without penalty. There’s a few things to consider on that front, so it’s worth discussing the situation with one of our Finance Specialists to make sure you take the right path.
Other considerations …
You won’t be surprised to see that there’s likely a few more fees and payments required as part of the sale of your property. Often you’ll need to pay the balance of any rates or utilities as well as the cost of your agent, conveyancer or solicitor, and the amount required for each of those is completely dependant on your specific situation.
The good news is, any money left after that point is yours to do what you like with (but be smart with it!).
What if your sale doesn’t cover your home loan?
This is called having negative equity. There’s a bunch of reasons this could be the case, from a dip in property prices through to you having the loan for just a short time, and although it’s not the end of the world, you’re still liable for the full amount of your home loan.
This might mean you’re asked to pay the difference with your own money, but it’s worth talking to a Finance Specialist to understand the outcome fully before committing to sell your property for less than you owe.
The key …
Pull together the right team. You want a solicitor or conveyancer to help oversee the transaction and you certainly should have your Finance Specialist ready to answer questions and explain some of the more complex parts of process, while making sure that your finances are structured right, whether it’s the right mortgage for you or just helping you set up a plan, budget and safety net just in case.