Selling a house with a mortgage: A guide for homeowners

Life brings all kinds of opportunities, as well as sudden shifting priorities. You might find yourself looking at selling your mortgaged home and wondering what your options are.

Perhaps you’re relocating for a new job, or your dream home has suddenly become available on the market. You might be starting a family (and need a larger home) or downsizing. Or perhaps you want to free up some cash for new endeavours.

The good news is that selling a home with an existing mortgage is entirely possible. In fact, it’s common – 35% of Australian households own their homes with a mortgage.[1]

In this guide, we’ll help you understand the process of selling a house with a mortgage so you can avoid unexpected costs, maximise your profit, and ensure an easy and successful sale.

Selling a home vs. an investment property

When selling a property, the tax implications and financial considerations differ depending on whether your home is considered a primary residence or an investment property.

A primary residence is the home you live in. In Australia, you generally won’t pay capital gains tax (CGT) when selling your current home, thanks to the main residence exemption.[2] However, if you’ve used part of your home to produce income, such as renting a room or running a business, you may have to pay CGT on a portion of the sale.

An investment property is defined as a property purchased with the intent to generate income, whether through rental property income or capital appreciation. It’s important to note that this definition focuses on the intent rather than the actual income generated.

If you sell your investment property within 12 months or are not an Australian tax resident, capital gains tax will apply to the entire profit made from the sale.[3]

However, if you have owned the investment property for more than 12 months and you are an Australian tax resident, you may be eligible for CGT exemptions of up to 50%.

If your property falls into a grey area, identifying its category will clarify your taxable income obligations and help you avoid capital gains where possible.

How does selling a house with a mortgage work?

When you sell a house with an existing mortgage, the proceeds will go toward paying off your home loan. Anything leftover is yours to keep.

If the sale price isn’t enough to cover what you owe (negative equity), you may need to cover the outstanding balance, negotiate with your lender, take out a personal loan, or explore other options, such as renting out the property until market conditions improve.

“Ultimately this is not a good position to be in, as essentially you owe the bank more money than what the property sells for,” said Fane Levy, Senior Credit Adviser for Shore Financial. “Since the bank has the first mortgage over the property, this means they have first rights to receive their funds back and essentially will have the power to either stop the sale from going through or request that any shortfall is paid simultaneously on settlement before the sale can go through.”

You’ll want to understand two things before selling your mortgaged home: a mortgage discharge and loan portability.

Mortgage discharge

A mortgage discharge is the process of officially ending your home loan agreement with your bank/lender. This happens when you sell your property and use the proceeds to pay off your current mortgage.

Here are the four standard steps for getting a mortgage discharge:

1. Request a discharge of mortgage form. Contact your lender for a payout figure. This figure will include your remaining loan balance and any fees, such as discharge fees (typically $150 to $600) or break costs for fixed-rate loans.
2. Your lender will review and process​​ the request. They will assess your income and any outstanding mortgage amounts, and prepare for settlement. Processing can take up to four weeks, so it’s important to start early.
3. Settlement occurs. On the settlement date, the buyer’s funds are used to pay off your mortgage. The lender will take what you owe them and any remaining balance after fees are transferred to you.
4. The title is updated at the land titles office. Once your mortgage is paid, the lender will remove their claim on the property title, allowing ownership to be transferred to the new buyer.

However, if you’re buying another property, loan portability could be a beneficial option.

Loan portability

Loan portability allows you to apply to transfer your existing mortgage to a new purchase in Australia without the need to close and reopen a home loan. This can help you maintain a low fixed rate or comparison rates, and prevent break costs.

To qualify for loan portability, the new property must be of similar value to the home you are selling and the lender must approve the transfer based on their criteria.

Additionally, for the transfer to go smoothly, both the sale and purchase settlements usually need to happen on the same day. If delays occur, a bridge loan may be needed.

Negative equity

If your mortgage balance is higher than your property’s sale price, you’ll need to find a way to cover the difference. There are a few ways you can do this:

• If you have savings or saleable assets, you could use the funds to cover the remaining amount.
• Your bank or lender may give you the option to apply for financial assistance.

If you are concerned about selling your house and having negative equity, consider speaking with your lender about your options.

What are the costs involved with selling a mortgaged home?

Much like when you bought your home, selling a house can come with various costs and fees*.

• Marketing costs: Advertising, professional photography, and staging ($2,000–$10,000).
• Real estate agent fees: On average, are 1.5%–3% of the sale price.
• Conveyancing/legal fees: Around $800–$2,500.
• Mortgage discharge fees: Most lenders charge $150–$600 to release a mortgage.
• Break costs (fixed loans): If you exit a fixed-rate loan early, fees can range from hundreds to thousands of dollars, depending on the remaining loan term and interest rate fluctuations.
• Stamp duty on new purchase: If buying another property, stamp duty applies and varies by state.

If your mortgage is on an investment property, you may also need to consider the capital gains tax.

*Based on costs and fees at the time of writing.

Penalties for selling a house before 1 year in Australia

Selling a house within 12 months of purchase in Australia can come with financial penalties and tax implications that homeowners should carefully consider.

If you plan to sell your house within the first year, you should be aware of the potential penalties.

Capital Gains Tax (CGT)

Selling an investment property before 1 year in Australia means you won’t qualify for the 50% CGT discount. This means that 100% of your capital gains will be taxed at your marginal income tax rate.

However, if the property was your main residence and met the Principal Place of Residence (PPOR) exemption criteria, you may not have to pay CGT.[4]

Selling costs

• Stamp duty: If you purchase a new home, you will need to pay stamp duty again. The amount varies by state but is usually a few thousand dollars.
• Real estate agent fees: The average cost is 1.5%-3% of the sale price.
• Legal and conveyancing fees: Typically ranging between $800–$2,500.
• Break costs for fixed-rate mortgages: If you have a fixed home loan, early repayment may trigger high break fees, depending on interest rate changes.
• Marketing and staging costs: Preparing a property for sale, advertising, and staging can easily add another $2,000–$10,000.

The bottom line

Despite the costs, people have many reasons to sell their house within a year.

While selling within 12 months can be costly, it may be the best option if you’re facing urgent financial or personal circumstances.

Carefully planning and understanding the tax and fee implications can help you minimise any losses.

Five tips for selling your house with a mortgage

When you sell your house with a mortgage, you’ll want the best price possible. Whether you’re looking to avoid creating negative equity or are securing the future house of your dreams, here are five tips for successfully selling your mortgaged home.

1. Get your mortgage payout figure before you put your home on the market

Before listing your home, contact your lender for a payout statement. This document will detail your remaining loan balance, discharge fees, and any break costs, particularly for fixed-rate loans.

Knowing these numbers upfront helps you understand how much you need from the sale to cover your mortgage.

2. Factor in all your selling (and buying) costs

Beyond repaying your mortgage, selling a house (and potentially buying a new one) comes with a number of costs. If your sale price doesn’t cover these, you may need additional funds.

3. Talk to your lender about loan portability to avoid extra costs

If you're buying another property, loan portability lets you transfer your existing mortgage to the new home instead of closing and reopening a loan. This can help you avoid break costs on fixed loans and save on application fees for a new mortgage.

However, your lender must approve the transfer and the new property must meet their criteria. You’ll want to get in touch with them as soon as possible to understand what your options for loan portability are.

4. Time your sale for maximum profit

If you have the luxury of time, selling in a strong market can help you cover your mortgage and selling costs while potentially yielding a profit.

Contact real estate agents in your area for advice, and research property trends, buyer demand, and seasonal price fluctuations to learn more about the market you’re planning to sell in.

If the market is slow, waiting a few months could mean a higher sale price and a better financial outcome.

5. Work with an experienced real estate agent

A skilled real estate agent will have the experience to help you navigate the process and get the most out of your sale. They can help you price your property correctly, create an effective marketing strategy, and negotiate the best possible deal with buyers.

They can also coordinate with your lender, ensuring a smooth mortgage discharge process and a hassle-free settlement.

Summing up

With the right preparation, selling a house with a mortgage can be straightforward. Start by understanding your mortgage payout figure and any potential fees involved, including agent commissions, legal costs, paying capital gains tax, and discharge fees.

If you’re buying another property, consider loan portability to avoid extra expenses.

At DiJones, our expert team can guide you through every step of selling your home while managing your mortgage. Get in touch today to ensure a smooth and successful sale.

FAQs

What happens to my mortgage when I sell my house in Australia?

If personal circumstances mean it’s time to sell your home, the proceeds from selling your property will go towards repaying your remaining mortgage.

Your lender will then discharge the mortgage, removing it from the property title. If the sale price exceeds your mortgage balance, you keep the remaining funds after covering selling costs.

What is the penalty for selling a house before 1 year in Australia?

If you sell your main residence within 12 months in Australia, you typically won’t pay Capital Gains Tax (CGT) due to the main residence exemption. However, you may face break fees on fixed-rate mortgages and will need to pay stamp duty if purchasing another property.

If your home is considered an investment property, you won’t qualify for the 50% Capital Gains Tax (CGT) discount, so you will need to pay 100% CGT on any profit.

Can I transfer my mortgage to another person?

Most Australian lenders don’t allow direct mortgage transfers. Instead, the new owner must apply for a new loan, and your existing mortgage must be discharged.