A “Mortgage” is the security that a borrower provides to a lender for a debt allowing the lender (eg bank) to sell the property in the event a default on a debt to that lender. A Mortgage” is not the loan that you have.
When you pay off all the lending (home loan) you have the choice to keep the mortgage in place OR request that it be discharged. The advantage of the mortgage being kept in place is if you require any further lending in the future the bank can advance a loan without having to register a new mortgage. This could save you between $600 - $800 in legal costs.
However the disadvantage in not discharging that mortgage is that the bank can still have legal rights over your property if you do not meet your financial obligations with any lending. This could include personal loans and credit cards. We have seen examples of this with clients wanting to refinance to another lender. While the loan approved from the new lender was sufficient to clear all residential lending the existing bank insisted that the credit card also be repaid otherwise they would not discharge the mortgage.
Another area where complications arise is when you have more than one property. A lender will usually have all lending secured by all properties that they hold a mortgage over. So while you may think that a property that you own does not secure any lending over it – it may well do. An example of this is a Client wants to buy a house for $500,000. They have $450,000 in cash and require a loan of $50,000 which the bank secures by taking a mortgage over the house. When the client pays off the loan the bank advise the client not to discharge the mortgage in case they want to purchase another property in the future which he does a year later for $400,000 which he rents out. He then decides to sell the first house and thinks he’ll come out of the sale with $500,000 less expenses. However this would mean that the remaining lending would be $400,000 secured against a house that is worth $400,000. That is an LVR of 100% which would be unacceptable to the bank. In all likelihood the bank would ask that when the house is sold the loan would need to be reduced – eg to lower the remaining LVR to 80% of the remaining property ie $400,000 X 80% = $320,000 meaning that the client would have to repay $80,000 in order to discharge the mortgage on the first house. Even though the client had repaid the original loan. If the client’s remaining property had dropped in value the amount to be repaid may be even more.
In order to discharge a mortgage you must make a request to your solicitor. There is a slight cost (usually no more than $250). We recommend that if you have lending and are selling a property that you consult with your mortgage broker. They are able to offer you all the solutions that come the time of your sale there are no unpleasant surprises.
