Are you ready to sell your property, but still owe on your home loan? In most cases, having an outstanding mortgage shouldn’t be a huge obstacle between you and a hassle-free home sale, although you may need the help of a legal professional to help guide you through the process.
How does selling property on credit work?
The basic principle is as follows.
- Sell your home through private sale or auction
- You will use the proceeds from the sale to pay off the rest of your home loan in one lump sum.
- Any money left over is yours to do with as you choose.
When you own a home with a mortgage, the bank or lender maintains a title deed with your state or territory’s land office. When you sell your property, you must contact your lender and fill out a mortgage discharge form to officially inform them that you are selling the property and that you are liquidating the property.
As this is a legal process, it is usually recommended that your solicitor or conveyancer be involved. They may have already helped you organize your property for sale.
It can take two to four weeks to fully process the mortgage forms, and you may need to pay a release fee to help cover the administrative costs of filing the release with the Land Office. Additionally, if you’re selling your home while you’re on a fixed-term home loan, you may have to pay vacation payments.
Can I buy another property before selling my current one?
Whether you’re upsizing or downsizing, it may be possible to buy your next space before selling your current space. This can reduce the time you spend moving your belongings into storage and finding temporary accommodation while you organize your next property purchase.
There are a few methods you can consider:
- Take a separate home loan: If you have the disposable income, you can apply for a second mortgage and buy the second property before selling your first. However, this may not be as easy as it sounds, as you need to show the lender that you can afford not one but two mortgages if you don’t sell the first one.
- Home Loan Mobility: To help keep you as a customer, some lenders offer to “port” your home loan from one property to another, so you can enjoy the same interest rate and other features and benefits. This is sometimes called a “security swap,” because you hold the same loan, but swap the collateral for it (the asset). While this may be convenient, it may be best to synchronize the settlement dates of both your property sale and your purchase. You may also need to purchase a property of equal or greater value.
- linking finance; Taking out a six to 12 month loan that covers your existing home loan, the purchase price of new property and associated costs such as stamp duty, legal costs and lender fees. Although only temporary, these loans can be expensive as they effectively hold two loans for a period of time.
- Deposit Bond: An insurance policy that assures the seller of the property that you will pay the full purchase price in settlement (if not, the insurer will pay the seller and pursue it instead). This allows you to make an offer on your next home today, and pay off the cost after the sale of your own home is complete. Of course, not all sellers accept a deposit, because it takes a long time for them to receive their money.
- Companion Offer: Offering to buy a property on the condition that you do not move in unless you sell your current property. Simple in theory, but not all sellers accept these offers because of the long wait.
What if my sale price doesn’t cover the mortgage?
Not every property increases in value over time. Buying with a low deposit and/or refinancing your home loan can leave you without much equity in your home. Sometimes circumstances require you to accept a lower price than you want when selling your property.
All this and more can contribute to finding yourself in “negative equity”, where the value of the property is less than the principal of the mortgage. This means that the sale price of your property will not be enough to cover the remaining balance on the home loan.
In such cases, you may need to recoup the shortfall in other ways, such as selling your car or other assets, or working out a payment plan with the lender and/or their insurers.
