What is a home loan settlement and how does it work?

Buying a home is an important milestone in many of our lives. The process typically starts with scouting for houses and ends with signing documents. One of the many boxes you will have to tick off as a buyer is a home loan settlement, also known as the mortgage settlement process.

What is a home loan settlement?

In Australia, the sale of a house concludes with something called a ‘settlement’. After you and the seller sign an agreement to sell, the settlement period kicks in. This period allows the parties time to check everything before they bind themselves contractually. 

The settlement date marks the end of the settlement period. On this day, several processes are followed to ensure that the sale of the home is complete. One of these is the transfer of legal ownership of the house from the seller to the buyer. This process typically includes registering a mortgage against the property that you’re buying, and that is why it is often also called mortgage settlement in Australia.

The settlement date is usually pre-negotiated and mentioned in writing to avoid any confusion between the seller and the buyer. It may take four weeks or more for the settlement period to conclude.

How does the process of a home loan settlement work?

A home loan settlement process comes into play if a home loan is used to purchase the property. On the settlement date, representatives for the lender, buyer and seller are present to help complete this process. This team will also include your conveyancer. A conveyancer is someone well-versed with the legal aspects of buying a home. They are responsible for ticking some of the legal boxes and making sure your rights are looked after.

The loan settlement process starts with you paying the remainder of the sale price. The lender’s representative then ensures that your mortgage is registered against the house you’ve just bought. Lenders hold the Certificate of Title (a document that confirms your ownership) as security for the loan. For you to have a clear title, the conveyancer will remove the seller’s mortgage. Your conveyancer will also ensure that: 

1. The transfer of property and mortgage get registered with the state authorities, and; 
2. All the terms in the contract of sale have been met.

In addition to this, you will have to pay stamp duty. You may also have to pay Lenders Mortgage Insurance (LMI). LMI protects the lender from the risk of a borrower’s default. Lenders usually require it in cases where you are borrowing more than 80 per cent of the property’s value. A final check is done to see if everything is in order, and then the keys are handed over to you.

Other important things to consider

It’s important to make sure all the documents are signed and dated, but your representative will usually help with this. Also, it is crucial to make sure that the funds in your account cover any fees that may have to be paid on the settlement date, like stamp duty or LMI. You may be able to reduce the settlement period by negotiation or if you and the seller opt for e-conveyancing. In that case, all documents are exchanged online instead of in person. 

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