Can you sell a home with a mortgage?

Interior of a home.
Photo by Nathan Fertig on Unsplash

Selling a home can be tricky enough, but what about selling a home with a mortgage on it? While it’s not uncommon for mortgaged homes to be put on the market, if you’ve never done it before you’re bound to have plenty of questions.

For one, what happens if your home sells for less than expected? And are there any fees? What about if you want to transfer your home loan from one property to another? Whatever the reason you’ve decided to sell, we lay out all the key information below. 

What is the process?

Before you can sell a home you still owe money on, you’ll need to arrange for the mortgage to be discharged. The first thing you should do then, is ask your lender for a discharge of mortgage form or download it from their website. 

Most lenders process a discharge request within two weeks, but some can take longer. For this reason, it’s a good idea to submit the form as early as possible so your lender can have things finalised well before the settlement date.

Once the house is sold and ownership is transferred to the new owners, your lender will collect the money needed to pay off the mortgage and register the discharge at the Land Titles office in your state or territory. 

Some fees will pop up along the way, such as the discharge fee and break costs if you have a fixed rate loan. These are usually deducted from the proceeds of the sale. You’ll also have to consider the usual costs involved in selling a property (more on that below).

What are the costs?

Discharge fee: this is the fee charged to end your contract with your lender. Among banks and lenders in our database, discharge fees range from $0 to $550.

Break fee:
this applies if you have a fixed rate home loan. When you terminate a fixed rate contract, it comes at a significant cost to your lender. The size of the break fee will depend on how much money is still owed and how long is left in the fixed term.

Conveyencer’s fee:
when selling your property, a licensed conveyancer or solicitor is needed to transfer the legal title of land to the new owner. Their services can cost around $1,000 to $2,000, so make sure you shop around.

Real estate agent fees:
a real estate agent will charge you either a flat fee or a commission for their services. A flat fee is fixed no matter what the house sells for, while a commission is a percentage of the final sale price, typically between 1 and 3 per cent.

Can I buy a new property at the same time?

If you plan to purchase another home, you might be able to transfer your home loan from your existing property to your new one. This is called loan portability, and it can spare you the costs associated with closing a home loan and applying for a new one.

Put simply, porting your home loan will allow you to keep your current lender, along with your home loan interest rate, balance, and any attached features.

The tricky part is that many lenders will require you to align the settlement dates of your property sale and purchase. Making those arrangements can be a headache, especially if there are delays in processing all the necessary documents.

Some, however, will allow you to make a deferred purchase settlement. In this arrangement, your lender will give you extra time (around six months) to settle on a new property after selling your old one.

What happens if my house is worth less than I owe?

When the outstanding amount on your mortgage is greater than the value of your home, this is known as having negative equity. 

This can happen if you bought at the top of the property cycle and prices have since dropped, or if you overpaid for the property and not enough time has passed for equity to build up.

Selling under these conditions isn’t exactly ideal. Unlike selling a home for more than what you owe, the final payout won’t be large enough to cover the outstanding balance on your mortgage.

To make up the difference, your lender might ask you to draw from your savings or even request the sale of other assets. They might also review your bank statements to make sure you’re not spending beyond your means.

If you’re unable to come up with the funds, your lender will get their mortgage insurer involved. Once the property is sold, the lender will recoup what they’re owed from the proceeds and the mortgage insurer will pay out the shortfall.

Your debt obligation will then be transferred to the mortgage insurer, who will then commence the process of recovering the amount owed from you or any guarantors on the home loan.

What are the alternatives to selling with negative equity?

If you have negative equity in your home because of a downturn in the market, it’s best to delay selling until property prices have recovered.

Until then, it can be a good idea to get ahead on your mortgage by making extra contributions. Try to avoid drawing on your mortgage too, as it’s always best to keep your outstanding balance as low as possible.

If, however, you’re thinking about selling because you’re unable to make your repayments, make sure you contact your lender first to find out if you’re eligible for financial assistance. 

Banks and lenders understand that major life disruptions - such as job loss, injury or illness, divorce, and death of a loved one - can make it extremely difficult to service a mortgage. That’s why they have specialist teams that can provide help.

Depending on your circumstances, this might involve temporarily pausing your home loan repayments, offering interest-free periods, extending the loan term, or waiving certain fees and charges.

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

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