When you buy a house, unless you can afford to pay outright, you will need to apply for a loan from a mortgage lender. If approved, you will need to pay back this money — plus interest — in monthly instalments for a set number of years.
Usually, a mortgage term is between 20 and 30 years, but it can be up to 40. This means that when you take out a mortgage loan, you are making a long-term commitment.
But what happens if your circumstances change and you need to sell your home sooner than you anticipated? If you haven’t yet paid off (or “redeemed”) the mortgage, you might be wondering whether it is even possible to do this.
If this is something you’re considering, you’ve come to the right place. In this article, we’ll answer this question and more.
Can I sell my house before the mortgage ends?
Yes, you can sell your house even if you haven’t paid off all the mortgage, and many homeowners choose to sell their houses with outstanding mortgage debt.
If you decide to do this, though, it is essential to understand that you will still be responsible for paying back the money you owe. Usually, you can do this with the money you make from the sale of your house, but if it has gone down in value, you will need to find the money from elsewhere or speak to your mortgage provider about alternative options.
Continue reading to find out more.
What is the process for selling a house with a mortgage?
Selling a house with a mortgage is similar to selling a house without a mortgage. First, you will need to find an estate agent to do a valuation, advertise your home and arrange viewings. Next, you will need to find a conveyancing solicitor to handle the legal side of things. Once you have accepted an offer, you and the buyer will negotiate and exchange contracts.
The differences between selling a house with a mortgage and selling a house without a mortgage come when ownership is officially transferred and the money is paid. If you are selling a house with a mortgage, your solicitor will use the buyer’s money to pay your mortgage lender the outstanding loan amount, including any charges you’ve incurred for ending your mortgage term early. Only once they have done this will they transfer any leftover sale proceeds to you.
What if my house is worth less than I paid for it?
Sometimes a house sells for less than the seller paid for it. While this is rare in the UK, it can happen during a period of recession or if the house is in a state of disrepair. It can also happen with new-build homes that are sold soon after they were first bought.
If the sale price of your house is less than the amount you owe your mortgage lender, you won’t be able to repay your loan using the sale proceeds. This is called “negative equity”.
If you find yourself in this position, all of the money from the sale of your house will go to the lender, and you will be billed for the outstanding amount. You will be given a deadline for repaying the loan and risk going to court if you do not pay on time. Your lender may also have rights over any other properties you’ve bought.
With that in mind, it makes sense to have your home accurately valued before you make the decision to sell. It may make more financial sense to wait until the property market improves.
If you have no other option but to sell your house for less than you paid for it, you may be able to pay the outstanding amount in the following ways:
- Using your savings.
- Asking your lender for a “Short Order”, which is where they agree for you to pay less than the entire loan.
- Asking your lender for a repayment plan so you can pay them back in instalments.
- Declaring bankruptcy. If you have other debts, this could be the best option, but it should be considered as a last resort, and you should seek help from a financial advisor before going down this route.
What if my house is worth more than I paid for it?
If your house is valued at more than the amount you bought it for, selling it — even if you haven’t paid off the mortgage — may be a financially viable option.
Before you make the decision to sell, though, it is a good idea to work out how much equity you have in your home. Equity is the amount of your property’s value that you own outright. To calculate your equity, subtract the figure left to pay on your mortgage from your house’s current market value.
As mentioned, if you sell your house for more than what you paid for it, your solicitor will transfer you the leftover proceeds from the sale once your mortgage and all other fees have been deducted. If you are buying another property, you may wish to put this money towards the deposit.
Can I port my mortgage?
If you are buying another house while selling your old one, you may be able to transfer your current mortgage to the new property. This is known as “porting”, and it can save you a considerable amount of money, as you don’t have to apply for another mortgage.
When you port a mortgage, you will have the same rates and terms as you did with your old mortgage, and you won’t be charged for ending your mortgage term early. But while it may feel as though you are simply taking the new loan to your new house, in practice, you will fully repay your old mortgage and take out a new one secured against the value of your new property.
The good news is that most mortgages are portable, but you will have to go through the same mortgage application process, which involves:
- An affordability assessment
- A valuation of your new home, which you will have to pay for
Can I borrow more if I port my mortgage?
You may be able to port your mortgage and borrow more, but only if you are topping up your loan with your existing lender.
You should also be aware that any additional borrowing will be taken out as a separate mortgage product. This means you will likely have to pay an arrangement fee for the new loan, as well as a higher interest rate than the one you’re paying on the loan you’re porting.
Paying off your mortgage before selling your house
If you decide to wait and sell your home after you’ve made all your mortgage payments for the entire length of the mortgage term, you will be able to keep the total amount of the sale price (less any fees you owe to your solicitor and estate agent).
However, if you’re considering paying off your mortgage early and then selling your house, you should be aware that you may have to pay Early Repayment Charges (ERCs) or mortgage exit fees. Lenders charge these fees because they’re losing out on the interest they were expecting to receive from you.
How much you are charged depends on how much you’ve borrowed, how much of the mortgage term is left and the type of mortgage you have:
Fixed-rate mortgage
You will normally have to pay an ERC if you pay off your loan early. This can be up to five per cent of the value of your mortgage, but in some cases, the percentage decreases the further into the term you are.
It may make financial sense to wait until the fixed term has ended before paying off the mortgage. Fixed rates usually last for between two and five years.
Standard variable rate mortgage
You won’t usually have to pay an ERC, but you may have to pay a mortgage exit fee.
Interest-only mortgage
You will usually be charged an ERC based on a percentage of your remaining mortgage. This is one of the most expensive mortgages to exit early from, as you will have only been paying the interest and have no equity in your property. If you are considering paying this type of mortgage off early, it is wise to seek help from an independent financial advisor before doing so.
Pros and cons of selling a house before the mortgage is paid off
When you sell a house with a mortgage, you are paying off the loan with the buyer’s money, which means you are exiting early. This means you will be subject to the exit fees mentioned in the previous section. Additionally, you will be at a disadvantage for the following reasons:
- If you sell your house for less than the amount you bought it for, you may struggle to pay the outstanding mortgage amount
- If you are unable to pay off your mortgage, you could face legal action
- If your existing mortgage loan is still outstanding when your new mortgage begins, you will have to make two mortgage payments a month until your existing mortgage is paid off
On the other hand, selling a house before you’ve paid off the mortgage has several benefits:
- If you sell your house for more than the amount you bought it for, you can be mortgage debt-free
- If you sell your house for considerably more than the amount you bought it for, you could make a profit
- If you’ve fallen behind on your mortgage payments, selling your house is a way to settle the mortgage debt
- If you’re struggling to make your mortgage payments, you can sell your house to settle the mortgage debt and then take out a more affordable mortgage on a cheaper property
Conclusion
Many homeowners choose to sell their houses before the mortgage is paid off. If you decide that this is the right option for you, it is important to understand that you will still be responsible for paying back the money you owe.
If you sell your house for more than the amount you paid for it, your solicitor will transfer you the leftover proceeds from the sale once your mortgage and all other fees have been deducted. If you are buying another property, you may wish to put this money towards the deposit.
