Selling a property with a mortgage on it

You can sell even if the mortgage is not repaid

A property with a bank’s lien on it is sold routinely. The only thing that changes is how the money is assembled: part of the purchase price goes straight to the bank to repay the loan and only the remainder to the seller. Escrow holds it all together, whether with a notary, a lawyer or a bank. The buyer’s payment is held in escrow and the seller never has to top it up from their own pocket.

The order of steps that works

• Ask the bank for the outstanding balance as at a specific date and for the terms of early repayment. Without that document the purchase contract cannot be drafted.
• Find out what early repayment will cost. For contracts concluded or newly fixed from 1 September 2024, the Consumer Credit Act allows the bank to charge at most 0.25% of the principal repaid early for each started year remaining until the end of the fixed-rate period, and no more than 1% in total. On older contracts only the costs actually and necessarily incurred are payable. A quarter of the principal can be repaid free of charge each year, and repayment is also free of charge in the life situations the Act lists.
• The split of the purchase price between the bank and the seller is written into the reservation and purchase contracts from the start.
• The purchase price goes into escrow. The escrow agent sends the first part to the bank to repay the loan, the bank issues a quittance and its consent to remove the lien.
• The application to register the transfer of ownership is filed together with the application to remove the lien.
• After registration, the escrow agent releases the remainder of the purchase price to the seller.

When the mortgage is larger than the purchase price

This happens with properties bought at the top of the market with a small deposit. There is a solution, but it has to be agreed with the bank in advance: the seller pays the difference at signing, or it is transferred to another loan. What does not work is going into a sale hoping it will somehow resolve itself at signing. By then there is neither time nor room.

The buyer taking over the mortgage

Sometimes it is better for the buyer to take over the existing loan, typically when it carries a low rate secured during a fixed-rate period agreed when rates were lower. The bank has to approve it and assesses the buyer exactly as it would a new applicant. It is a route that can save hundreds of thousands, but it takes longer and cannot be relied on without the bank’s written consent.

Income tax in brief

Income from selling a property can be exempt from personal income tax. What decides is the time test under § 4 of the Income Tax Act: five years for properties acquired up to the end of 2020, ten years for those acquired from 1 January 2021. Housing in which the seller had their residence for at least two years immediately before the sale is also exempt. And if you do not meet the test, the exemption can still apply where the proceeds are used for your own housing need under § 4b of the Act. The condition is notifying the tax administrator no later than the deadline for filing the tax return for the year in which you received the money. Miss it and the exemption is lost; it cannot be made good afterwards.

The tax on the acquisition of immovable property was abolished by Act No. 386/2020 Coll. with effect from 26 September 2020, so buyers no longer pay it. Always have your specific tax position confirmed by a tax adviser; this paragraph provides an overview, not advice.

What the buyer will want from you

A serious buyer asks about the lien straight away. Show them the bank’s statement of the outstanding balance on the spot and explain how the escrow will work, and it stops being a risk and becomes administration. That is the whole difference between a listing a buyer walks away from and one where they sit down at the table.