Selling a home with a mortgage: your guide

Ready to sell your property, but still owe money on the home loan? In many cases, having an outstanding mortgage shouldn’t be too large an obstacle between you and a hassle-free home sale, though you may want help from a legal professional to walk you through the process.

How does selling a property with a mortgage work? 

The basic principle goes something like this:

1. You sell your house, whether via private sale or auction
2. You use the money from the sale to pay off your remaining home loan in one lump sum.
3. Any money you have left over is yours to do with as you choose

When you own a house with a mortgage, the bank or mortgage lender will hold the Certificate of Title with your state or territory’s Land Titles Office. When you sell your property, you’ll need to contact your lender and complete a Discharge of Mortgage form to formally notify them that you’re selling the property and ending the mortgage. 

Because this is a legal process, it’s usually recommended that your solicitor or conveyancer is involved. They’ll likely have already helped you organise your property’s contract for sale.

Discharge of Mortgage forms can take two to four weeks to fully process, and you may need to pay a discharge fee to help cover the admin costs of registering the discharge with the land titles office. Additionally, if you’re selling your house while you’re still in the fixed period of a fixed rate home loan, you may need to pay break fees.

Can I buy another property before selling my current property?

Whether you’re upsizing or downsizing, it may be possible to buy your next place before selling your current place. This could minimise the time you’d have to spend putting your possessions into storage and finding temporary accommodation while organising your next property purchase.

There are a few methods you could consider:

• Take out a separate home loan: If you have the income available to afford it, you could try to 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’ll need to show the lender that you can afford to service not one, but two home loans, just in case you don’t sell your first one.
• Home loan portability: To help keep you as a customer, some lenders will offer to “port” your home loan from one property to the next, so you can keep enjoying the same interest rate and other features and benefits. This is sometimes called a “security swap”, as you’ll keep the same loan, but swap the security for it (the property). While this can be convenient, it can also be fiddly to synchronise the settlement dates of both your property sale and your purchase. You’ll also likely need to be purchasing a property of equal or greater value.
• Bridging 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 lenders fees. While only temporary, these loans can be expensive as you’ll be effectively holding two mortgages for a limited time.  
• Deposit bond: An insurance policy that guarantees to a property vendor that you will pay the full purchase price on their property at settlement (if you don’t, the insurer will pay the vendor and chase you up instead). This can let you make an offer on your next house today, and pay the cost once your own house sale has gone through. Of course, not all vendors will accept a deposit bond, as it means it will take longer for them to receive their money.
• Contingent offer: Offering to buy a property on the condition that you won’t be settling until you’ve sold your current property. Simple in theory, but not all sellers will accept these offers due to the longer timespan involved.

What if my sale price doesn’t cover the mortgage?

Not every property goes up in value over time. Buying with a low deposit and/or making redraws from your home loan could leave you without much equity in your home when you sell. Sometimes circumstances require you to accept a lower price than you’d prefer when selling your property.

All of this and more could contribute to finding yourself in “negative equity”, where the property value is lower than the mortgage principal. This could mean that the sale price for your property won’t be enough to cover what’s left on the home loan.

In cases like this, you may need to make up the shortfall in another way, such as by selling your car or other assets, or working out a payment plan with the lender and/or their insurer.

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