What Happens to Your Mortgage When You Sell?

Selling your home can feel overwhelming, especially when you still have a mortgage attached to it. Many first-time sellers assume the loan simply “disappears” once a buyer is found. It doesn’t work that way. When you sell, you must formally discharge the mortgage with your lender, settle any remaining balance and fees, and remove the bank’s legal interest from the property title before ownership can transfer.

This guide explains the process in clear, everyday language so you know what happens to your mortgage at each stage of the sale and how to avoid delays and unnecessary costs. It also explains how things work if you are buying another property, using loan portability or dealing with negative equity.

Next Step: Understand how your mortgage will be paid out at settlement and compare local agents who can guide you through the process smoothly.

Mortgage discharge explained

When you first took out your home loan, your bank registered a mortgage over the property. This gives the lender legal rights over the property until the loan is fully repaid. You cannot transfer ownership to a purchaser until the mortgage is removed.

Removing this mortgage is called a mortgage discharge. It’s a legal and administrative process handled by your lender, your conveyancer and the buyer’s legal team. It ensures your loan is paid in full, your bank releases its financial interest and the title becomes clear for transfer.

Many sellers are surprised by how formal this step is, but it protects both you and the buyer. Without a discharge, settlement cannot occur.

Step‑by‑step discharge timeline

Below is a typical 21‑day schedule for electronic settlements. Rural or paper processes can take longer.

1. 1. Lodge the Discharge Form (Day 0)

   You complete your lender’s online or paper discharge request form.
   Your bank won’t start the process until they receive this, so do it early.

   2. Lender Processing (Days 1–10)

   Your lender:
   • Calculates your payout figure
   • Determines any break costs (if fixed-rate)
   • Confirms fees
   • Prepares the documents needed to release the mortgage

   Some banks take longer, especially during busy periods or if multiple loans are tied to the property.

   3. Book Settlement (Days 10–18)

   Your conveyancer, the buyer’s conveyancer and both lenders agree on a settlement time.
   This is coordinated through PEXA for electronic settlements.

   4. Settlement (Around Day 21)

   The buyer’s lender transfers the purchase funds. Your loan is paid out and the bank removes the mortgage from the property title. Title control passes to the buyer’s lender.

   Your lender will deduct all fees and charges at this point before releasing any surplus funds.

Mortgage discharge fees

Different lenders charge different fees, so it’s smart to check your loan contract or ask your bank early in the sale process.

• Mortgage discharge fee
  This is a common fee for discharging your mortgage and can be anywhere from $150 to $400. Lenders charge this to cover the admin costs of paying out your loan in full.
• Break costs
  This only applies to fixed rate loans. The cost will vary depending on the length of your remaining fixed rate term, the agreed rate and whether current rates are higher or lower than your existing rate.
• Early payment fee
  If you pay off your mortgage within 3 or 5 years, some lenders may charge an extra fee.

What Happens to Your Mortgage at Settlement?

For many first-time sellers, settlement day can feel confusing because a lot happens behind the scenes. Settlement is the moment the buyer officially becomes the new owner of your home. It is also the moment your mortgage must be fully paid out and legally removed from the property title. You don’t pay the loan yourself on the day. Instead, your conveyancer and the buyer’s lender handle the payment for you through a secure settlement platform like PEXA.

Here’s what actually happens. The buyer’s lender sends their funds into the settlement workspace. Your conveyancer takes that money and pays your lender first because the bank must be paid in full before ownership can transfer. This payment includes your remaining loan balance plus any discharge fees or break costs if you were on a fixed rate. Once your bank receives the payout, they release their interest over the property and remove the mortgage from the title.

Only after your loan and any outstanding council or water rates are paid will your real estate agent’s commission, marketing fees and legal costs be deducted. The remaining money is your equity. Your conveyancer then transfers this to your bank account or uses it to help you buy your next home. In short, settlement is the final clean-up process, where all debts tied to the property are paid out so the buyer receives a completely debt-free title.

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What happens to my mortgage when I buy another property?

If you’re selling and buying around the same time, you’ll usually need to handle your mortgage on the property you’re selling while applying for a new loan for the home you want to buy. These two processes run side by side. When you sell, your current mortgage will be discharged as normal. This means the bank removes their interest from your old property once the loan is paid out at settlement.

While this is happening, you’ll also be working with a lender to secure your next home loan. Most buyers get pre-approval first so they know what they can afford. Once you find your next home, your lender will do a final assessment and then register their interest over your new property when it settles. For a short time, the two loan processes overlap, but you do not keep paying two full mortgages unless you choose to buy first.

It’s important to remember that each lender assesses your borrowing power differently. If you choose a new lender, they’ll run their own checks on your income, credit history and equity position. If you stay with the same lender, the process can sometimes be smoother because they already know your repayment history. Either way, your old loan ends at settlement and your new loan begins when your next purchase settles.

Can I transfer my mortgage to my new property as a substitution of security?

Yes, some lenders offer home loan portability when you sign up for a mortgage. This allows you to keep your existing loan when you sell and simply transfer the lender’s interest to the title of your new property. This is called substitution of security. Your mortgage may increase or decrease:

• If you are buying a more expensive property, your lender may increase your loan amount or you may contribute extra funds. 
• When you end up buying a cheaper property instead, your lender will either reduce your loan amount or give you the remaining part of the sale amount.

What happens when the sale price doesn’t cover the mortgage?

Sometimes you find yourself in the unfortunate position of owing more on your mortgage than what your property is worth in the current market. This is called negative equity. 

A lender will not allow settlement to occur if they are unable to recoup the full outstanding mortgage amount. You will need to pay the difference from your own funds or sell some of your assets to make up the shortfall.

In this situation, it might be better to hold on to the property until its market value increases. You might even be able to rent it out and cover some of the ongoing costs of ownership. For more on renting out your property, click here.

Should I buy or sell my property first?

Depending on your situation, buying or selling first could be the right option for you. Before you list your home or go house hunting, it pays to know the pros and cons of each.

Pros and cons of buying first

Pros and cons of selling first

What is simultaneous settlement?

Timing property deals can be tricky but, with a good real estate agent, it is possible to buy and sell at the same time. This is called simultaneous settlement.

For this to work, you, your buyer and the seller of your new property will need to be flexible. If one party can’t fit in with the schedule of the other two, then simultaneous settlement won’t work.

Benefits of simultaneous settlement

Despite the challenges, many homeowners do manage to settle simultaneously, which gives you the best of both worlds. You:

• know how much you have to spend
• Reduce stress about whether you will sell or buy in time
• only need to pay for one mortgage at a time
• avoid having to move twice.

Using a bridging loan

If you can’t manage simultaneous settlement but have found your dream home and simply can’t wait, a bridging loan can help bridge the gap between when you buy and when you sell.

A bridging loan is temporary and charges a higher interest rate, so it isn’t the right option for everyone. Read more about simultaneous settlement, bridging loans and other options in our guide to buying and selling at the same time.

What happens if I sell without a mortgage?

If your hard work has paid off and you are mortgage free when you decide to sell your property, the entire sale price comes to you at settlement, minus any selling fees, like conveyancing fees. 

But, for the vast majority of homeowners, owning a property means a large debt to their lender, which can be costly if you decide to discharge the mortgage early since lenders rely on interest payments to stay in business. An experienced real estate agent can save you money throughout the sales process, which is often enough to cover the cost of an early mortgage discharge. Compare agents in your area and see how they can help you achieve a successful sale.

Conclusion

Selling a home with a mortgage doesn’t have to be confusing or stressful once you understand how the process works. Your mortgage doesn’t disappear automatically. Instead, it must be formally discharged so the bank’s interest is removed from your title before the buyer can take ownership. When you know what to expect at each stage the whole experience becomes far easier to manage and far less overwhelming.

For many sellers, the biggest surprise is how much coordination goes on behind the scenes between lenders, conveyancers and agents. A small delay with one party can affect the whole timeline, which is why having a skilled real estate agent and a reliable conveyancer makes such a difference. Whether you’re buying again, transferring your loan, settling simultaneously or simply closing out your mortgage, the right support helps you avoid costly mistakes and keeps your finances on track.

Understanding these steps early puts you in control. You can plan with more certainty, budget more accurately and make clear decisions about when to sell and how to structure your next move. With the right preparation and the right people guiding you, discharging your mortgage becomes just another smooth, organised part of your home-selling journey.

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