Should we pay off the £96,000 left on our mortgage when downsizing?

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Q I am rather confused about my mortgage as I have never sold a property before. In a nutshell, 13 years ago we bought a house for £195,000 that we paid for with a £150,000 mortgage and £45,000 in cash. The house is now worth about £330,000 and there is £96,000 left on the mortgage.

We now want to downsize to the coast and properties we like are about £250,000. Should we pay off the £96,000 mortgage on selling or take out a small mortgage? We are unable to move our mortgage but also we like the idea of being mortgage free but are so confused. We have made financial mistakes in the past and don’t want to add another one.

A When you sell a property that has a mortgage secured on it, you don’t have a choice about whether or not to pay off the outstanding loan as it happens automatically. This happens even if you are able to “port” your mortgage (which you say you are not). Although the process of porting is often described as taking your mortgage with you when you move, what porting actually means is repaying your existing mortgage on the sale of your current property and then taking out a new mortgage for your new property but on the same terms and conditions as your old mortgage.

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So if you managed to sell your house for £330,000, after clearing the £96,000 mortgage, you would have £234,000 left over to pay your legal and estate agents’ fees and to put towards your next property. At a rough guess – and assuming typical estate agent fees of 1.5% (including VAT) and other fees associated with selling and buying of £2,000 (also including VAT) – you would have just over £227,000 to spend on your new home. So unless you have £23,000 tucked away in a savings account somewhere, you’ll need a mortgage of that size to buy a property costing £250,000. But note that if you decided to take out a mortgage with a new lender – rather than with your existing one – you might have to borrow more than £23,000. At Nationwide, for example, there’s a minimum loan of £25,000 for new mortgage customers but £5,000 for existing borrowers.

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On the plus side, if you manage to sell and buy somewhere new by 31 March 2021, you won’t need to factor in the cost of stamp duty land tax (SDLT) because until that date SDLT is not charged on properties costing up to £500,000. However, after that date, SDLT goes back to normal, so you would face a bill of £2,500 on a property costing £250,000.

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