When the time comes to move up the housing ladder, most people will need to sell their existing home to pay for their next one.
So what does this mean for the mortgage you already have? Here are a few things to consider.
Getting a redemption statement
When you sell your home, you will need to appoint a conveyancer to handle the legal side of the transaction for you. One of their tasks will be to contact your mortgage lender to get a redemption statement for the date you expect to sell your home. This sets out just how much is outstanding on the mortgage. It will be paid from the proceeds of the sale.
Paying off the old mortgage
The money you receive from the sale of your home will be used to pay off the outstanding mortgage on the property. Any remainder can then be put down as a deposit on the new property you are buying.
For example, if you have £150,000 outstanding on your mortgage and sell your home for £200,000, you will have around £50,000 to put towards the purchase of your new home.
Taking your mortgage with you
If you have a particularly attractive mortgage — say, one with an extremely low interest rate — you may be able to take it with you through a process called ‘porting’.
The lender will carry out the usual checks over the property, as well as your financial position to ensure you can still afford the repayments. If they are happy, they may agree to offer the same terms and conditions on your new property.
There are several positives to porting your existing mortgage. Obviously, the fact you get to keep the original terms of your home loan can be an enormous boost, particularly if interest rates have risen substantially since you took out that initial loan. What’s more, porting means you will avoid paying any early redemption charges on the mortgage, which can be significant if you are still within the fixed or tracker period.
If the property you are buying is more expensive, you can apply to borrow more. However, your lender may charge a higher rate for this additional borrowing.
There are some reasons a lender may not be willing to port your mortgage. Your personal circumstances may have changed — your salary may have fallen, or you’ve taken on additional debt in the form of loans or credit cards — to where you no longer meet their lending criteria. Alternatively, the lender may not be comfortable with the type of property you want to buy.
If your lender won’t allow you to port your existing deal, and you need a mortgage in order to purchase your new property, you will need to apply for a new product elsewhere.
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Fees for closing your mortgage
Closing the mortgage on the home you’re selling may involve paying a number of fees you will need to budget for.
For example, if you are within the initial fixed or tracker period on your mortgage, you may need to pay an early repayment charge. This is calculated as a percentage of the outstanding mortgage, and so can run into the thousands of pounds.
As well as early repayment charges, you may be charged an exit or closure fee. This will vary depending on your lender, but can cost in the region of £75 to £300.