You haven't paid your mortgage but you'd like to sell your home, or relocate and rentvest.

But what happens to your home loan when you sell or move?

We'll show you what to do.

You're not alone

It's very common for Australians to have unpaid mortgages when they sell or move.

While Australians are spending more and more time in the same home, we still tend to move around at least once every 10 years or even more, as our sister company Moving Loop discussed recently.

Almost 40% of us changed addresses in the five years before the 2016 Census and 15% moved house in the year prior.

At the same time, most mortgages have a 25-30 year average length.

It's, therefore, no surprise to see homeowners switching homes, or moving several times between buying their first home and signing off on their final mortgage.

Let's have a look at what happens to your home loan when you sell and what your options are.

How soon can I sell my home?

Lifestyles including employment can change overnight so you may have to move and sell far earlier than expected.

You certainly don't need to live in your new home for 25 years or more until you've fully repaid your mortgage.

Legally speaking, you can sell your home any time after the settlement date.

But it's generally believed best to hold onto your home for at least two-three years.

First-home buyers (FHBs) applying for FHB government grants and similar will find they need to spend at least one year living at their new residence before they can sell.

If nothing else, you'll save money on moving this way - as well as on all the many costs and stresses such as sales advertising - if you wait a few years before selling.

How does selling a house with a mortgage work?

Firstly, you need to find out much you owe on your mortgage because regardless of your future real estate plans, you will still need to repay these finances to your lender.

You then have two possibilities: arranging a discharge of mortgage (if you intend to sell now and buy another property later) or organising loan portability (if you're selling and buying again simultaneously).

Let's inspect both possibilities.

Mortgage discharge

Discharging your mortgage means you're permanently closing your mortgage.

You'll need to contact your lender to tell them of your plans and complete and sign a formal discharge form, which they can send you directly or it may be available on their website.

The processing of this form can take two or three weeks so it's best to have this point organised ASAP to ensure you have such details finalised well before settlement, otherwise your settlement may be delayed.

Once the lender has received your form, they will speak with your conveyancer and organise to be there on the day of settlement.

Your lender will also organise to receive their due mortgage repayments via the conveyancer on this day.

After the house is sold, the lender will then register your mortgage discharge with your state or territory Land Titles office.

This will legally show that the lender no longer holds a financial interest in the property.

While all of these points may seem like a lot to organise, in actual fact, it's a fairly simple transaction for sellers with conveyancers doing most of the hard yards for you.

After receiving your bank details, the conveyancer will organise to have your profit (cross fingers!) transferred to this account after settlement.

All fees and similar costs - including your mortgage repayments to the lender - will have already been subtracted from this figure. 

As well, mortgage discharges can be an excellent opportunity to refinance with the same, or a different, lender or loan.

NB: you will need to keep making mortgage repayments until your property sale is finalised

Loan portability

Also known as a security swap or substitution of security, this feature is an easy, no-think way for simultaneous sellers and buyers to continue - instead of discharging, or cancelling - their mortgage.

Loan portability will effectively see you switch your mortgage - and its required repayments - to the next property you buy.

As with mortgage discharges, you'll need to contact your lender ASAP to organise the "port" switch.

Benefits

1. You don't have to reapply for a loan at a time when stress and time factors are already high
2. Ideal for those happy with their current loan and lender as these will stay the same
3. Fixed-rate borrowers won't have to pay a break fee and you can also avoid establishment and similar fees and costs

Disadvantages

1. Not every loan offers this feature
   
2. Port features are usually for the same amount as your current mortgage which might not work for upsizer buyers
3. You'll need to organise simultaneous settlements for the sale of your current home and the purchase of your new home ie both must occur on the same day

What happens if my house is worth more than I owe?

This is definitely where you want to be financially when you sell - otherwise known as positive equity.

Basically, your house is worth more than the value of your mortgage and it means you can keep all the profit you make on your sale - minus what you still need to pay to the lender as well as other costs and fees.

This profit can then be used to buy your next property or for your next move.

To enjoy positive equity, it's extremely important to sell at the "right" time of the market while also having repaid as much of your mortgage as possible.

What happens if my house is worth less than I owe?

Ouch!

Negative equity is not what you want to experience but it happens when your mortgage repayments are higher than your home's value.

In other words, you'll be unable to pay your lender for your outstanding mortgage balance after your home sells - as compared to when your equity is positive and you have a profit left over after this balance is paid.

Negative equity is most likely to occur when property prices are dropping - particularly in comparison to the rising price cycle in which you first bought.

It can therefore be an excellent reason for holding onto your home a little longer so that you can repay more of your mortgage.

How can I work out my profit (or loss)?

You'll need to include prices such as staging and selling your house and any remaining council rates and similar that you still owe when you leave the property.

Investors will also need to factor in extra taxes.

And finally, of course, how much of your mortgage have you already paid?

Adding and subtracting such details will give you a good idea of how much you can spend on your new home - or on your move to another location if you plan to rentvest.

For example, you sell your home for $570,000 but still have $370,000 to repay on your mortgage.

Minus real estate staging and selling ($30,000), as well as tax ($20,000) and you're left with $150,000 profit.

Such subtractions will be calculated before settlement day with everyone involved - including your lender - receiving what they're owed from you.

What fees should I be aware of?

Fees

• Discharge fees and break costs (if you're on a fixed-rate loan)
• Possible fee for paying your home loan early
• Conveyancing
• Agent commissions including sales and advertising (if you're selling your home)
• New home loan fees including establishment fees

Where does this leave you?

We hope we've answered your questions about what happens to your home loan when you sell. Rest assured, you're not alone. And, if you need help finding your next place, we can help you buy and sell off-market properties.

We can also help you refinance, and invest through our sister company, Lending Loop.

To access the property market you were previously missing out on, sign up at Listing Loop or download our app.

Our off-market and pre-market marketplace gives you VIP access to properties so you can get in first.