What happens to your home loan when you sell & move?

It’s fairly common for homeowners to sell and move houses when their mortgage is not fully paid off. In fact, only about a third of Australians who’ve purchased homes own them outright. Life happens and sometimes you need to upsize, downsize or move to a new area. So, how does this impact your home loan?

What happens to your home loan depends on whether or not you have a portable home loan. While not essential, loan portability makes the home loan transfer process easier. Keep reading to find out what your options are.

Arranging a mortgage discharge when you sell your home

Before you can begin settlement when you sell your home, you’ll typically be required to get your mortgage discharged. The process can take between 2 and 3 weeks, and involves filling out a discharge of mortgage form and giving it to your lender.

After the form has been lodged, your existing lender will liaise with your conveyancer or solicitor to sort out settlement. The relevant land title office for your state or territory will usually be informed at this point about the discharge.

There are usually fees involved with a mortgage discharge, such as a discharge fee. If you are breaking your fixed rate home loan, you’ll also need to pay break fees. There could be additional costs, depending on your lender and circumstances.

Accounting for discharge and solicitor fees, real estate agent commissions and any other outstanding rates, the leftover balance will be yours. These funds will be transferred to your bank account if you aren't purchasing another property.

• Related: How to get a high offer when selling your home

Getting a new loan for your new property

If you want to stick to the same lender for your next property purchase, it’s smart to apply for the new home loan when you lodge the discharge form. Doing this streamlines the process and makes it easier for you and the lender.

Is it better to sell or buy first?

If you have a substantial amount of equity in your home and a solid income, buying first could be an appropriate move. This way, the lender will take security over both your existing and new homes, so you’ll have to be in a position to make repayments on the cumulative loan balance.

This is an option to avoid if you are lower income and/or have low equity. A lender could decline your loan application or you end up having to sell your home quickly below market value.

If your property could take longer to sell and you have limited equity, it’s probably better to sell your home first before buying a new one. The main drawback to selling first is that you may need to rent a temporary home while you search for a new house to buy. However, you may be able to come to an agreement with the new owners to either delay the moving in date or rent the home from them while you find a new place.

On the plus side, you’ll have the necessary funds on hand to purchase your new home. Sometimes when you buy first, it can be difficult to come up with a deposit. Because of this, some home buyers will use a guarantor loan, but this is not an option that everybody has.

Simultaneous settlement

Simultaneous settlement is where the sale of your old home and the purchase of your new home happen at the same time. Of course, this is a pretty difficult move to make work. You, the buyers of your home and the people selling you their property will likely be on different schedules.

If it does work, you won’t have to worry about finding temporary accommodation or making mortgage repayments on two properties. Simultaneous settlement is quite risky and it’s a good idea to consult with a financial adviser before going down this path.

• Related: How it works: buying and selling at the same time

What is a bridging loan?

You can use a bridging loan when you buy a home before you’ve sold your current property. It allows for you to own both properties temporarily, but requires you to have at least 40% equity, typically.

With a bridging loan, it means you have more time to sell your current home and can move into your new place. You will be charged higher interest during the period of dual ownership, but it may be worth it for the right person.

Home loan portability

Home loan portability is a loan feature that you may be able to add on to your home loan package when securing your initial mortgage or when refinancing. Not all lenders offer it, but it’s something to consider if you don’t see yourself remaining in the same home for 20+ years.

Loan portability allows you to easily transfer your current home loan onto your new property, helping you to avoid the hassle of closing one loan just to apply for another. You’ll be able to hang on to the same loan features (e.g. offset accounts or redraw facilities) and loan structure.

When you transfer your existing home loan onto your new property, you’ll also bring over the remaining loan balance and interest rate. Of course, you can completely refinance this loan or even ask your lender for a lower interest rate on the same loan.

• Related: Want to reduce your interest rate without refinancing?

Benefits of home loan portability

Can be cheaper than applying for another loan which often involves upfront fees The process will likely be faster than it would if you had to apply for a new home loan Can avoid break costs Retain the same interest rate, loan features, structure and lender

How much does loan portability cost?

It will vary between lenders and home loan products, but you can expect to pay around $200 to transfer the mortgage between properties. This will probably be less expensive than the costs involved with discharging a loan and applying for a new one.

Remember that loan portability doesn’t mean that you can also transfer over stamp duty and other costs you paid for your existing property. For every property you purchase, you’ll be required to pay stamp duty (aka transfer duty) unless you are exempt.

Negative equity

Negative equity refers to when the value of your property falls below your home loan balance. For example, say you took out a $550,000 home loan to purchase a $600,000 property. If the market value of the home falls to $500,000 and you still owe $520,000 on your home loan but you want to sell the property, you’ll have an extra $20,000 that you’ll be required to pay off.

If you sell while your home is in negative equity, you’ll be required to pay back the shortfall. Before you sell, the bank will assess the situation and may ask you to sell assets to cover the shortfall. If you can’t immediately pay up, they will ask their mortgage insurer whether the sale can go ahead. If the insurer approves, they will cover the shortfall by paying the bank and then make an arrangement with the seller to recover these funds.

You can reduce negative equity before you sell by:

• Increasing your property’s value through renovations and improvements
• Making extra home loan repayments
• Getting a professional valuation to understand your equity
• Leaving funds in your redraw facility

Calculate your equity here:

• Related: 11 home renovation ideas to boost your property’s value
• Related: 14 low cost ways to add value to your home

Australians all over the country are selling and moving right now. So while it can seem overwhelming, you’ll get there in the end. Surround yourself with good expert support from a financial advisor or an experienced broker.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.