Selling a house with a mortgage: what you need to know
Selling a house with a pre-existing mortgage is often a source of uncertainty. Many people wonder whether it’s possible to sell your property while you’re still on a fixed-rate mortgage, and what considerations you need to bear in mind if you want to sell your house before the mortgage term is up. Both transferring your mortgage and terminating it early are subject to particular conditions and have specific ramifications. We explain what you need to consider if you want to sell your property with an ongoing mortgage.
What happens to my mortgage when I sell my house?
Generally speaking, your credit agreement with the lender is not automatically terminated or transferred to the buyer when you sell your house. No matter the situation, it’s the lender who needs to amend or terminate the contract.
That’s why there are a few things to consider when selling a property with an ongoing mortgage, and why there are various options for how you can handle your mortgage when selling a property.
- You can transfer the mortgage to a new property. This means that the mortgage is transferred from your current house to your new home.
- The mortgage can be transferred to the buyer. In this case, the buyer of the property takes on the existing mortgage.
- You can terminate the mortgage early with your bank. The mortgage is paid off in full at the bank using the proceeds from the sale or your own funds.
Transferring your mortgage to a new property
Although the bank is not obliged to transfer your mortgage to a new property, many banks are often accommodating towards mortgage-holders.
Certain conditions need to be met before a lender will consider transferring a pre-existing mortgage to a new property:
- The value of the new property should be at least equal to the value of the original property.
- The sale of the property should take place very shortly before the ownership of the new property is handed over.
- The mortgage-holder’s financial situation should not have changed significantly since the mortgage was taken out.
Transferring a mortgage to a new property entails the contract being amended, which usually entails fees. It is advisable to find out about the possible fees in advance and to obtain information about this so you can estimate the costs that will be incurred.
Transferring the mortgage to the new owner
If the mortgage-holder is unable or unwilling to take the mortgage with them – for example, because they’re moving into a rental property or because their new property is worth less than the property originally listed in the contract – they have the option of transferring the mortgage to the new owners. Both the buyers and the bank must consent to the existing mortgage being transferred to the new owner. However, this process is not without its challenges:
- the bank may refuse to give consent, especially if the buyers do not meet all the criteria that the bank sets for the assumption of the mortgage, such as creditworthiness or other financial conditions.
- The sale process can become significantly more complicated if a new buyer takes on the mortgage. This could limit the pool of potential buyers, as not everyone is able or willing to take on the ongoing mortgage.
The advantage of transferring the mortgage is that the mortgage-holders do not have to terminate the mortgage prematurely and, in turn, can avoid any early repayment charges. Do note, however, that this approach also requires the contract to be amended – which may incur fees.
Terminating your mortgage early
If the mortgage can’t be transferred to your new property or to the new owners, it is possible to terminate it prematurely, i.e. before its term has expired.
When a mortgage is terminated early, the bank invests the repaid mortgage amount in the money market or capital market for the remainder of the term. If the yield is lower than the interest rate originally agreed with the mortgage-holders, the bank will incur a loss. This loss is charged to the borrower and is used as the basis for calculating the early repayment charge. If the bank is able to generate a higher interest rate on the capital market, the borrower is generally compensated the difference.
Before terminating your mortgage early, it is therefore worth checking the current interest rates on the capital market. This will help you avoid potentially high costs in the form of early repayment charges.