Selling when you owe more than the house is worth (negative equity in Queensland)

What 'underwater' actually means

Equity is the sale price less everything that has to be paid out of it. A property that sells for $700,000 with a $690,000 loan is not sitting on $10,000 of equity — agent's commission, marketing, the payout figure including break costs, unpaid rates and water, body corporate arrears, and the legal fee all come out of the same pot. Once those are added, a sale that looks marginally positive on paper is often tens of thousands of dollars short.

The figure that matters is not the loan balance on your app. It is the bank's formal payout figure at the proposed settlement date, which includes accrued interest, discharge and registration fees, and any fixed-rate break cost. Break costs on a fixed loan taken out at the bottom of the rate cycle can be substantial and are frequently the thing that tips an even sale into a shortfall.

• Sale price, less agent's commission and marketing
• Less the bank's payout figure at settlement, including break costs and discharge fees
• Less rates, water and body corporate levies adjusted to settlement
• Less any second mortgage, caveat, writ or registered charge on the title
• Less legal fees and any ATO or QRO clearance withholding

Why it is a problem for a seller, not just the bank

In Queensland the seller must give clear title at settlement. That means every mortgage, caveat and writ on the title has to be released. A mortgagee will only produce a release if it is being paid out in full or it has formally consented to a short payout. If neither has happened by the settlement date, the seller cannot settle — and the seller, not the bank, is the one in breach of the contract.

That breach is where the real damage is done. A buyer who is ready, willing and able to settle can terminate, keep the deposit, and sue for its loss on a resale in a falling market. In the meantime interest keeps running on a loan the seller can no longer service, and the alternative is a mortgagee sale, which almost always achieves a lower price and adds the bank's enforcement costs to the debt.

• No mortgage release means no settlement, and the seller is in default
• Penalty interest under the contract runs from the settlement date
• The buyer may terminate, forfeit the deposit and claim damages
• The shortfall survives the sale as an unsecured personal debt to the bank
• A mortgagee-in-possession sale usually nets less and costs more

The shortfall does not disappear when the property does

Selling clears the security, not the debt. Whatever is left owing after the sale becomes an unsecured debt the bank can still pursue, and if there were guarantors — commonly parents who put their own home up — the bank can look to them instead. Any second mortgage or personal guarantee sitting behind the first mortgage is in exactly the same position.

This is why the shortfall has to be negotiated as part of the sale rather than left to be sorted out afterwards. Banks are far more willing to agree a repayment arrangement, a partial waiver or a hardship variation while they still need your cooperation to get a clean, well-priced sale than they are once the property is gone.

How we help a seller through a shortfall sale

The work is front-loaded. Before the property is listed, or at the very least before a contract is signed, we build the true settlement position and take it to the lender in writing. From there the transaction is managed against that number rather than against a hopeful estimate.

• Obtain a formal payout figure and a title search, so every mortgage, caveat and writ is identified early
• Prepare a settlement shortfall statement showing the real net position at a realistic settlement date
• Apply to the lender for consent to a short payout, or a hardship variation under the National Credit Code where the seller qualifies
• Negotiate the terms of the release: whether the residual debt is waived, repaid by instalments, or preserved, and whether default is reported
• Deal with second mortgagees, caveators and judgment creditors, who each have to be paid or persuaded to release
• Structure the contract with a settlement date and conditions that give the lender's consent time to come through
• Ask the agent to consider commission timing, and confirm rates, water and body corporate arrears before they become a surprise adjustment
• Coordinate the electronic settlement so the funds flow exactly as the lender's consent requires

Options other than an immediate sale

Selling is not always the answer, and part of our job is to say so. Depending on the circumstances a hardship variation, a period of interest-only repayments, refinancing, renting the property out, or bringing in a family loan properly documented as a loan and mortgage may buy the time the market needs. Each option has consequences — for tax, for later family law or estate claims, and for the guarantors — which is why the decision should be made with advice rather than under pressure from a looming settlement date.

Where a sale is the right answer, doing it as a controlled sale with the lender's consent is almost always better for the seller than waiting for enforcement. The seller keeps control of the price, the agent and the timing.

If you are already under contract and short

Do not wait to see whether it resolves itself. Tell your solicitor immediately, get the payout figure that day, and open the conversation with the lender. There is usually more room to move while the contract is still on foot — an extension of the settlement date, a variation, or a consent to short payout — than there is after the buyer has issued a notice to complete.

Negative equity and shortfall sales in Queensland — common questions