Most Australians who sell their home don’t own their property outright. So, understanding what happens to your loan when you sell is knowledge worth having.
How your mortgage works
When you first took out your home loan, your chosen lender places a mortgage on the property you bought.
That mortgage shows up on the property title because, as the lender, they have a legal interest in that property. Holding the mortgage means that, if you don’t meet your repayments and default on the loan, they can pursue legal avenues to recover their money, and that may include selling your property.
If you sell the property while it still has an active mortgage, the lender obviously loses their right to sell it. To protect themselves from this eventuality, you must settle the full amount of your mortgage – called a discharge of mortgage – on the settlement day with the incoming buyer.
Arranging your mortgage discharge before settlement day
The process to discharge a mortgage can take time. Because it can take as long as three weeks, in some circumstances, it’s vital that you take the first steps to arrange your mortgage discharge as soon as you know the settlement date of the property you are selling.
Talk to your conveyancer, as well as your lender or mortgage broker, to make sure you have the right information at your fingertips and know exactly what you need to do – and when!
Once you have completed your discharge of mortgage application, your lender will talk to your conveyancer (or solicitor) and make the necessary arrangements to be present at settlement, as required. At that time, any money they’re owed will be received by them and the lender will lodge a discharge of mortgage with the land titles office in your State or Territory. This confirms they no longer hold a financial interest in the property you have sold.
Discharging a mortgage can come with its own unique fees, depending on your lender and the circumstances or conditions around your mortgage, such as break costs. Some lenders also charge a fee to borrowers who pay out their mortgage earlier than contracted and these fees will be added to the amount they will receive from your property sale on settlement day.
If the amount you owe the lender is not covered by the amount incoming from the sale, you will need to have other funds available to discharge the mortgage, or the property settlement will not go through successfully.
What happens next?
Your conveyancer should fill you in on any outstanding rates and utilities, as well as any fees owed to other relevant parties, such as the real estate agent who sold your property.
If you’re not buying another property immediately, any leftover funds will usually be deposited into your nominated bank account. If you are buying another property and have arranged a simultaneous settlement day, any money owed to you from the sale of your property will be paid directly to the purchase of your new property.
You may then need to make additional funds available towards the purchase price. If those funds are coming from a new mortgage, your chosen lender will then place their own mortgage over the new property. If your State still has paper certificates of title, the bank will hold the certificate of title for the new property you are buying as security for your mortgage.
Substitution of Security
Substitution of security, or loan portability, is the ability to transfer your existing mortgage from one property to another. Depending on your own financial circumstances, and your lender, you may be able to pay a small fee to transfer your current mortgage balance from the property you are selling onto the new property you are buying. This means that the interest rate and other existing loan terms continue for your new property.
To achieve this, you may have to increase the size of your loan or contribute additional funds. However, if you’re buying a property that is cheaper than the one you just sold, you may receive some of the sale price back from your old home, or simply reduce the balance of your loan. To find out more about this option, talking to your lender or mortgage broker is recommended.
Trust a professional team
Dealing with finance issues around property sales and purchases is serious business. With the right team of professionals around you – including a trusted accountant, conveyancer, solicitor and loan broker – you can have the best possible knowledge to help you make informed decisions that properly protect your financial interests.
Have a question about the process? Or want to speak to a member of our team? We’re here to help. You can get in touch on 1300 932 738.
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This article is provided for general information purposes only. Its content is current at the date of publication. It is not legal advice and is not tailored to meet your individual needs. You should obtain specialist advice based on your specific circumstances before taking any action concerning the matters discussed in this article.