How Selling Up Affects Your Mortgages
You’ve successfully negotiated the sale of your property. Congratulations! If your property is for investment purposes you might be congratulating yourself on the profit you will make once the deal is done.
Contracts are in place, solicitors have been in discussions and you’re planning the lead up to the settlement. It’s not all plain sailing at this point however – there may be a party with a vested interest in your property who still need to be handled. Your lender. As an interested party they need to provide their clearance before your property can change hands, and they will only allow this when your mortgage has been cleared with them.
Depending on how your existing property mortgage has been structured the process of mortgage repayment may be simple or complex. There are some factors you need to consider regarding your existing mortgage arrangement that will impact the process of selling up.
How much does it cost to break a mortgage?
If you hold a fixed rate mortgage you need to remember it is a commitment for the period specified by the fixed rate. As such if you repay the mortgage early this is an ending of the contract and may come with exit penalties. These break costs will vary from lender to lender and, although there are regulations that prevent lenders from charging exorbitant costs, these fees can still be substantial.
Lenders may base their calculation on the original amount of the loan or the balance that is still owing. They are not obliged to follow a set rule for making their calculation but will generally base it around the difference between the rate you were paying and the current market rates applicable – after all they have sourced your funds from somewhere and have calculated their margins on the assumption you will see out the remainder of the agreed period so they may be left with a loss if they can’t re-lend the funds on the same basis.
A decrease in interest rates, as has been common over the last few years, will make it more difficult to relend the funds at a similar rate and may increase the amount of penalty they charge.
Even if your interest rate has been variable you can still expect some minor fees from your lender to have the mortgage discharged – after all they still have to complete paperwork at their end to unencumber your property.
Shifting Loans When Repurchasing
In some circumstances your mortgage can be moved to a new property with a fee for doing so. If this is not in your agreement you are faced with refinancing with the existing lender or finding a new lender. In the event you refinance with the existing lender you may be in a better position to discuss break fees with them should early exit penalties arise. Generally you will find most lenders are not particularly negotiable on their exit fees, especially if you plan to refinance elsewhere, but some degree of discussion may still be held, especially if they know you are back in the mortgage market.
Ideally the time to investigate the costs of exit fees on your mortgage is when you take the original mortgage out. It certainly pays to check what these costs will be before you begin the process of selling up
Implications on your borrowing power
Usually, terminating an existing loan will increase your borrowing power for future purchases. There may be some exceptions to this rule, for example if the rent you used to receive from the sold property was relatively high.
By selling your property, you hopefully made a nice profit. Those funds can now be used as a deposit for your next purchase(s).
If you are considering selling then talk to our team about your costs and options for doing this so you are in a position of being informed before you go ahead.