Most mortgages have a term lasting at least 25 years, so moving house before fully paying off your home loan isn’t unusual – in fact, it may be the most common scenario.

But if you’re considering selling a house with a mortgage, you may have questions about how exactly the process works.

This article will clarify all of the above, including the different options available to homeowners, key considerations and the case of negative equity.

Can You Sell a House with a Mortgage?

Selling a house with a mortgage is a common choice. While signing up for a home loan technically means signing up for a specific loan term, you can generally pay off your mortgage early or transfer the existing loan to a new property.

However, there are some considerations and obstacles…

Paying off a Mortgage Early

Paying off a Mortgage Early

If you decide to pay off your house early (known as “redeeming” or “early redemption”), a mortgage lender may impose early repayment charges (ERCs).

These will be stated in your mortgage contract, and you should consider them as additional costs when selling the house.

However, the upside is that you’ll be removing yourself from the financial burdens of having a mortgage to deal with.

Transferring a Mortgage Loan

Transferring a Mortgage Loan

The other option is to transfer your existing mortgage to a new property (known as porting). In this case, you will redeem your previous mortgage while taking out a new mortgage deal with the same term and interest rate.

Your ability to pursue mortgage porting will depend on the lender. If your financial circumstances have changed, they may not want to re-lend the money.

Depending on current market decisions, you may also decide that it’s not a good option.

For instance, if you took out your mortgage for a higher interest rate than what is currently available, you might be better off ditching your existing mortgage deal and switching to something new instead. Who doesn’t want to save money after all?!

What if You Have Negative Equity?

Redeeming or porting your mortgage is generally simple enough if the value of your home is high enough to cover your mortgage.

As in the example below, if you originally bought the property for let’s say £150,000 with a mortgage of £120,000 but you can only sell it for £110,000 – you will be in £10,000 negative equity.

Selling a House with a Mortgage (Negative Equity)

If you sell your house for less than the value of your loan, you won’t earn enough from the sale to pay off the outstanding mortgage balance or transfer it to an identical loan.

In this case, you’ll need to find additional funds to make up the shortfall.  This can happen if you’ve taken an interest only mortgage where the loan amount doesn’t reduce during the course of the term. This also prevents the benefit of building up equity over time.

Will I End Up with Negative Equity?

Historically, house prices in the UK have trended upward over the long run – just look at the incredible price growth in London over the years.

However, some properties buck the overall trends. For instance, flats with cladding or areas that have become less desirable and decreased in value.

When this happens, there’s a chance you could earn less from selling your house than the value of your existing mortgage debt. This is known as a mortgage shortfall. If you fail to pay it, the mortgage company could take legal action against you.

One potential solution is a short sale, meaning your mortgage lender agrees to a reduced payoff for your home, allowing you to complete the sale.

How Does Selling a House with a Mortgage Work?

The process of selling with a mortgage differs depending on whether you decide to redeem or port a mortgage. However, most of the differences come into play after the home sale itself.

Below, we’ve outlined what to expect.

1. Value the House

Value the House

As mentioned already, the value of a home is the crucial ingredient in selling a house with a mortgage.

Organising a valuation for the property will help you determine your options.

If the sale of the house isn’t enough to pay off the mortgage, you will need to ask the lender for permission to sell and will have to make up the shortfall yourself.

2. List Home For Sale

List Home For Sale

The house sale process works broadly the same whether you’re selling a house with an existing mortgage or no mortgage.

In most cases, it will make sense to work with an estate agent, who will handle the administrative and practical sides of selling a property.

You’ll have to go through the usual processes, such as:

  • Preparing your house for sale
  • Marketing the property
  • Allowing for prospective buyers to view the property
  • Collecting relevant documents such as the EPC

However, there are alternative options, such as selling through a property buying company to fast-track your home sale. These firms provide an instant cash offer below market value, but allow you to avoid estate agent fees and skip some of the usual hurdles involved in selling a house.

The choice you make will largely depend on your personal circumstances.

3. Accept Offer

Accept Offer for Property

Assuming everything goes well, an interested buyer will eventually make an offer to purchase your house.

Once you accept the offer, you can exchange contracts with the buyer.

As with any house sale, this can be a complex process, especially if there is a chain of buyers.

While you’re waiting for the house sale to complete, you’re responsible for making the mortgage payments, alongside other bills like insurance.

4. Receive Funds (or Apply For Another Mortgage)

Receive Funds (or Apply For Another Mortgage)

When you sell the house, your solicitor or conveyancer will repay the existing mortgage loan on your behalf. As part of this process, your solicitor will get a redemption statement from the lender.

This breaks down the outstanding debt, so they can work out how much of the sale should go toward the lender and how much goes to you (if there’s anything leftover).

Any early repayment fees or other charges will be paid separately.

Therefore, the main difference between selling a house with no mortgage and with a mortgage is that you’ll receive less money after the sale.

If you want to port your mortgage, this final step will work a little differently. While you get to keep the same deal when you port, the new property will still need to meet the lending criteria. Plus, the mortgage lender will assess your financial situation again.

Depending on whether the price of your next house is higher or lower than your current property’s value, you’ll either:

  • Increase the amount you borrow
  • Put more savings toward the next loan
  • Reduce the amount you borrow

Bear in mind that if you need to borrow more, you will need to go through a new loan application process, which will likely result in a different rate.

Pros and Cons of Selling a House with a Mortgage

Still unsure whether selling a house with a mortgage is right for you? We’ll break down some potential pros and cons.

Advantages

Selling a house with a mortgage is one of the best things you can do if you’re currently behind on mortgage payments and worried about repossession.

Similarly, for those who can no longer afford their mortgage payments – maybe because their current mortgage deal was a variable rate and the interest rates increased, or their personal circumstances have changed – selling the house makes sense.

By selling you can opt to buy a cheaper property with more manageable monthly payments.

In some lucky cases, selling a house with a mortgage can even be a way to clear your existing mortgage balance. If property prices increased enough, you may earn enough profit to buy a smaller house without a mortgage (unencumbered).

Drawbacks

As with anything, there are drawbacks to selling.

Ultimately, the decision will come down to the property’s valuation. If the property isn’t worth enough for you to be able to cover your mortgage, selling is an expensive decision since you have to make up the difference yourself.

Then there’s the possibility of having to pay early repayment charges. These can be as high as 5% in some cases. There are also the costs associated with taking out a new mortgage deal to consider, such as an arrangement or exit fee.

How Long Do You Have to Wait?

There isn’t a fixed rule about how quickly you can sell a house after taking out a mortgage, so it comes down to the discretion of mortgage lenders.

Generally, you should wait at least six months after moving into a house to sell it if you want to port your mortgage. This is because lenders will generally only allow new mortgages for properties that have been on the land registry for this long.

Also, it can be difficult to convince sellers to buy your house if you’ve only moved in very recently, as they may assume there’s something wrong with the property.

Choose What’s Right for You?

Selling a house with a mortgage is a common choice. Most people won’t live in one home for the rest of their lives, and since paying a house off in full is rarely feasible, selling with a mortgage is the only way to move.

Porting or redeeming a mortgage are the two main options. However, in the case of negative equity, selling with a mortgage is more difficult.

If you’re interested in using a property buying company to speed up the process of selling a house with a mortgage, make an inquiry to Property Solvers to find out how we can help you. We can take care of the hassle of selling and secure a sale in just 7-28 days wit auction and estate agency options also available.

Selling a House with a Mortgage Through Property Solvers