Can you sell a house before paying off the mortgage?

When you buy a home, you commit to repaying the mortgage for 25 to 30 years. In that time, you may want to sell your house while still paying the mortgage on it. Maybe you need something larger or smaller, or you’re moving to another town. What do you need to do in this situation?

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It's fairly common for owners to sell a house while still paying the mortgage. There are basically two ways to deal with selling a house before the mortgage is paid; either through a mortgage discharge, or loan portability.

You’ll need to understand these options so that when you put your home on the market and search for a new one, you can discuss your preference with your lender.

A mortgage discharge means you’ll be selling the house and paying off the mortgage. You’ll need to fill out the mortgage discharge form and submit it to your lender. Your lender will provide you with a statement of the amount still owed on the mortgage and your discharge costs.

Once your sale is complete and you receive the payment from the buyer, your lender will take what is due and register the mortgage discharge at the Land Titles office. However, you will still be responsible for repayments until the day that the discharge is completed.

Your lender may charge a discharge fee for this process. There may also be additional fees to pay, such as break costs if you were on a fixed-rate loan. These costs will likely also be covered by the sale price.

Selling a house with negative equity

The property market is dynamic, and while you may be selling your house before the mortgage is paid off, it’s possible that you owe more on your property than what you can sell it for. This is known as negative equity. This situation can arise due to various factors, such as a decline in property values, market fluctuations, or if you borrowed with a high loan-to-value ratio and haven’t owned the property for very long.

Since you’re responsible for repaying the full amount owing on your home loan, the lender will likely take steps to recover their money before settling the mortgage. In this case, you may need to cover the shortfall from your own pocket to fully repay your existing mortgage before you can move forward with the purchase of your new home.

If you’ve finalised the purchase of your new home, you could ask your lender about loan portability. Loan portability or a loan transfer feature allows you to transfer your loan from your old property to the new one.

Instead of going through the process of closing your existing loan and applying for a new one, loan portability enables you to keep the same loan with the same lender, interest rate, and terms, but secured against the new property. If you have a good history with your lender, a healthy credit rating, and proof of income, your loan portability approval should go through smoothly.

This can be a simpler and more convenient option for some, as you’ll continue to deal with the same lender, interest rate, and other facilities. However, keep in mind that there might be a fee involved to make use of this feature, and the lender may require a valuation of the new property to ensure it meets their lending criteria, which could incur additional costs.

If the new property is more expensive, you may need to increase your loan amount, which could involve further assessments and potentially higher repayments. Conversely, if the new property is cheaper, you may receive some of the sale proceeds from your old home, or reduce the loan balance.

Managing the sale and purchase of homes simultaneously can be quite tricky. If you sell first, you’re likely to be confident in your financial position to buy the next property. However, you’ll also need a rental to live in until you get the new place, and will have to move house multiple times.

If you buy a new property before selling your current house, this could cause financial stress. You may need to have two mortgages, or apply for bridging finance for a period, which means repayments could become challenging.

So getting the timing right is critical. It's also essential to plan for all the changeover expenses to avoid any financial crunch. This will include budgeting for discharge fees, break costs (if any), agent’s commission, marketing and advertising fees, stamp duty, registration costs, and title transfer fees. In addition, you’ll need to keep funds aside for moving expenses and even rent if you need it.