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I am thinking about buying a property with a mortgage in the UK, living in it for 3 years, and then selling it. This is because at that point, I will probably be moving out of the city I am currently in, and I would then want to buy another place elsewhere. I have a decent deposit and so buying and selling soon after is still cheaper than renting for this 3-year period.

Please could somebody explain how this would work with regards to paying off the mortgage early?

So hypothetically let's say it is a 25 year mortgage (full capital repayment), borrowing £300k, at a fixed interest rate of 4%. After 3 years, I then sell the property (let's say it hasn't increased in value) for £300k. Let's say by then, I will have paid off about £22k, and so there will still be £278k remaining to pay.

Which of the following scenarios is correct:

1) I can just pay off the entire remaining mortgage of £278k with the cash I received from the sale, all in one lump sum.

2) If I want to pay it off in one lump sum, I will have to pay more than £278k, to account for the fact that I originally "agreed" with the bank to pay it back over 25 years, and therefore the bank wants to gain some of this interest which it would have otherwise not received.

3) I just have to keep paying it back monthly over the 25 years, as originally agreed, and I will have to use the £300k I received for the sale and whatever other cash I have to fund this.

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  • With fixed rates option 2 would usually be the case, as you would be penalised and have to pay a fee for breaking the loan agreement early. If you had a variable rate loan (if available where you are) you would just need to pay the outstanding loan amount plus usually a small closing fee.
    – user9822
    Commented Jan 10, 2016 at 0:23

2 Answers 2

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(This answer relates to mortgages in the UK.)

It's definitely not option 3. You can't keep a mortgage on a property that you no longer own. Whether it's option 1 or option 2 depends on the terms & conditions of your mortgage -- some mortgages have early redemption penalties and some don't. In general, a fixed-rate mortgage is likely to have a penalty for redemption within the fixed-rate period, and a variable rate mortgage is not. But read the small print before signing the contract.

Do be aware that if house prices fall in the three years, you may be trapped. You will generally not be able to sell the property at all if the proceeds of the sale won't repay the mortgage, unless you can make up the difference from your other financial resources. Some lenders under some circumstances might allow you to transfer your negative equity to a different property.

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    The OP has forgotten to mention how much deposit he is putting down, so we don't know how much equity would be available at time of sale if prices did drop. Also if prices have dropped then he might also get his next property at a lower price.
    – user9822
    Commented Jan 10, 2016 at 0:26
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    @MarkDoony If he can't afford to redeem the mortgage then he won't get the next property at a lower price, because he can't move. You can't sell a property with a loan secured on it without the lender's permission, which they won't normally give if the sale won't redeem the mortgage. And even if he can just pay off the mortgage, he might not have enough left to put down a deposit on a new property.
    – Mike Scott
    Commented Jan 10, 2016 at 6:38
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    I voted you up on this answer, however, as I said the OP mentions he already has a sizeable deposit, so this equity together with however much is paid off in 3 years may add a buffer to any price movement down. We don't know what amount the deposit is so we don't know how much equity would be available. And even if the house is worth less than the remaining mortgage, the OP may have other funds available to pay off any remaining portion of the mortgage after the sale of the house. And this would only happen if prices went down alot, which is unknown and speculation.
    – user9822
    Commented Jan 10, 2016 at 8:39
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    Actually from the OPs other question he has $150,000 available for deposit and looking to buy a house worth $450,000 with a mortgage of $300,000. So the starting equity would be about 33%, which may rise to about 40% after 3 years. Meaning prices would have to fall by more than 40% for your scenario to eventuate.
    – user9822
    Commented Jan 10, 2016 at 8:50
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    A lot of variable rate mortgages in the UK have some kind of promotional rate at the start. There is typically an early repayment fee within that promotional period.
    – Nigel Harper
    Commented Jan 11, 2016 at 12:35
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Your first choice is correct. With a minor warning. Make sure there's no pre-payment penalty. I've seen mortgages that have a penalty for paying off faster than the agreed amortization. Actually a penalty if paid faster than X years or more than X money per month.

I understand your premiss. Keep in mind, stuff happens. If the value of the home drops, at what point is your break even. 10%? 20%?.

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    Your answer is correct for the U.S. But is it correct for the original poster's country?
    – Jasper
    Commented Jan 9, 2016 at 17:18
  • Not sure how that would be. There's either a prepayment penalty or not. I've seen both, and didn't reference it as likely, or rare.
    – JTP - Apologise to Monica ♦
    Commented Jan 9, 2016 at 18:17
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    The typical terms used in the UK are "overpayment" (for paying more than the required payment) or "early redemption" (for paying the whole thing off).
    – Ganesh Sittampalam ♦
    Commented Jan 9, 2016 at 20:40

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