What Happens to Your Mortgage When You Sell?

If you have a mortgage on your home and want to sell, you may be wondering how this will impact your home loan. You might also consider whether to sell or buy first and how the whole process works. Our comprehensive guide includes everything you need to know about what happens to your mortgage when you sell.

The process of discharging your mortgage

When you take out a mortgage to buy a home, your lender registers a formal interest in the property, which is recorded on the property title. If you decide to sell, you will need to repay your mortgage in full because the lender will no longer be able to use your property to regain their funds.

Paying your mortgage in full and releasing the property title from the lender’s interest is called mortgage discharge. To do this, you need to:

• Complete and sign a mortgage discharge form during the settlement period.
  Once you provide this to your lender, it can take up to 3 weeks to process.
• Your lender and conveyancer or solicitor will communicate directly to organise settlement.
• The lender will register your mortgage discharge at the relevant Land Titles office,
• The property title will no longer show the lender’s interest on the title.

Your lender will take fees at settlement for the discharge of your mortgage.

Mortgage discharge fees

When you sell, you need to consider any lender fees for paying off your mortgage. These can include:

• 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 my mortgage at settlement?

At settlement, the buyer and buyer’s lender will pay the full price for your property. The solicitor will release the following fees to the appropriate recipient:

• Mortgage discharge fee, break costs and early payment fee (whichever apply) to your lender
• Amount to settle outstanding rates and utilities
• Real estate agent fees
• Their own fees for the legal process
• Any other fees related to the sale of your property

The remaining money from the sale of your property will either go to the owner of the new property you want to purchase or to your bank account.  

What happens to my mortgage when I buy another property?

Many homeowners buy a property after selling their own property. During the sale settlement period, you will discharge your mortgage as normal and apply for a new home loan at the same time. Your lender will then discharge their interest on the title of the home you’re selling and register an interest on the title of your new home.

You can choose to apply for a new home loan with your current lender or a different lender.

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.

If your lender allows home loan portability, you may be able to refinance or ask for a lower interest rate at the time of transfer.

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.

If your lender recoups the difference between the mortgage and sale price from your mortgage insurer, your insurer will then request the money from you.

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	Cons
If you find the perfect home, you can buy it without worrying about when or if the sale of your property will go through.	You will need substantial equity in your current home and a good income to afford the cumulative loan balance.
You can avoid a lengthy settlement period.	Without the proceeds from a sale, you might need to buy something cheaper than you planned.
Timing is not as much of an issue, as you can move into the home at your leisure.	Your lender might decline your application if your finances are too stretched.
Without the pressure of selling, you are free to keep the property and rent it out, bringing in additional income.	Once a cumulative loan balance becomes reality, or if something changes, you may end up under pressure to sell fast for less.

Pros and cons of selling first

Pros	Cons
A sale first gives you a deposit ready to go whenever you find a place to buy.	If you have nowhere else to stay, you will need to pay to rent somewhere else once your property sells.
You only have one mortgage at a time, which is better for low-income earners.	Moving twice in a short period can be costly and inconvenient.

If you sell first, the new owners might agree to rent the property to you until you find a property to buy. However, some buyers need a place to live themselves, so this is not always a feasible option.

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.

Speak to an agent about simultaneous settlement

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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.