How to Sell Property With an Outstanding Mortgage
Home loans are typically entered into for several decades, so it's quite common for people to want to change their place of residence, sell their old home and purchase a new one during that time. But how can this be done if the existing property was purchased with a home loan?
In theory, the solution is simple: sell your old home, pay off the home loan early, enter into a new home loan agreement and use the money from the sale as a down payment for the new home. According to Anne Pärgma, head of residential lending at Swedbank, such a plan sounds good, but various technical nuances can arise in the process. "For example, it's not always possible to time the purchase and sale transactions so that the new home is ready to move into immediately after the old one is sold," she said.
What to do in such a case? According to Pärgma, the solution depends on people's wishes and financial capacity – if income allows, a new property can be purchased with a second home loan even before the current residence is sold.
"For this, you need to submit a new loan application, after which the bank assesses your financial capacity, which should be sufficient to cover both the new and existing loan payments," she explained. "Once the new home is purchased, the person temporarily pays two home loans, during which they can deal with selling the old property."
According to Pärgma, in such a situation it's also important to think for yourself about how long your wallet can afford to pay two loans, as housing comes with other expenses, such as utilities. "It's also worth planning in advance how long the property sale is expected to take, as for example, in the city, transaction activity is significantly higher than in scattered settlement areas," she added.
If desired, the bank can also offer payment breaks to reduce payments, or create payment schedules so that only interest is paid until the existing property is sold. "In addition, the existing property can be used as additional collateral for the new loan – but this depends on how long and what amount of the current home loan has been paid," Pärgma explained.
If paying two home loans becomes unbearable, you might consider selling the old property before purchasing the new one. In such a case, according to Pärgma, it's worth considering whether it would be possible to stay in temporary accommodation after moving out, for example in a rental apartment. "Friends or relatives can also help, and it's worth asking them if they can offer temporary housing," she said.
Exchange transactions also occur
While in most cases property purchases and sales transactions are formalized, sometimes situations arise where property with a home loan is exchanged for another property. "Usually we encounter such transactions within families or between relatives. Here we recommend consulting with a notary beforehand about what type of transaction should be formalized to protect the interests of all parties," she said.
What type of transaction would be most reasonable to formalize in such situations? According to Tiia Tomberg, a notary in Tartu, all transactions must be conducted in a way that reflects the parties' true intentions, including transactions between family members.
"If the purpose of the transaction is to give something to another person for free, the correct way is to formalize a gift agreement. A gift must bring joy to both the giver and the recipient, and the giver does not want to receive anything in return for the gift," she said.
"If the purpose of the transaction is to give something to another person on the condition that they give something that belongs to them in return, the correct way is to formalize an exchange agreement. An exchange agreement is essentially like two sales agreements," Tomberg explained.
According to Tomberg, the transfer of ownership of property does not affect the pledged right to the pledged property. "Typically, lenders want to know about the change of owner of the pledged property, so the contracts for the disposition of pledged property must be previously agreed with the lender, i.e., the pledge holder," she added.
In summary, according to Pärgma, it's always wise to consult with a bank if you're planning transactions that involve existing property related to a home loan. "Each case is unique and requires well-thought-out decisions. This way, you ensure that changing or selling your home will succeed without stress and unexpected surprises," she concluded.
