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How to sell a mortgaged property?


How to sell a mortgaged property?
Soaring property prices and reduced purchasing power of buyers have made bank loans an essential part of almost every property deal. Property investors have seen good investor interest due to easy availability of loan facilities through banks and financial institutions. A property is normally bought for the following purposes:

- For own use i.e. buyer lives in such property

- To earn a regular income by letting the property for rent to another person

- For investment purposes i.e. to earn a good return in the long term

Loan plays a vital role in all the purposes as mentioned above. The investor opts for a loan while buying a property to leverage his position and buy more properties with less own funds. The property bought for rental purpose requires to earn an income more than the cost of the loan to repay the debt quickly.

The buyer gets involved in a loan for buying a property in the interest of good return keeping the prevailing market trend in view. A sudden upward revision in the interest rate, delay in possession of property or similar problems, spoils the overall plan. In such situation the property buyer finds it difficult to repay the loan and thus determines to resell the property. Selling a mortgaged property could be difficult for many people because of procedural ignorance. So lets discuss the procedure required for selling the mortgaged property.

The property buyer takes property loan in two different ways:

- When the loan is not taken over by the buyer

- When the buyer agrees to take the seller's loan

Condition 1: When a buyer does not take over the loan by the borrower

In this situation where the buyer does not want to take over the loan by the borrower, the seller is required to take a written document from the bank/FI, declaring that it would return all the original documents of property after final settlement. Once the payment is received from the buyer, the seller is required to deposit the amount directly in the bank and take all papers along with no due certificate. The seller receives the original document within 10 to 15 days and initiate the property transfer to the buyer's name.


Condition 2: When a buyer takes the loan along with property from the seller

The seller has an option to pass the property along with the due loan amount if the buyer intends to do so. The seller first enters into an agreement for sale with the buyer. Now the buyer or its bank would clear the loan amount directly to the seller's lender. The loan is not transferable but the buyers directly clears the loan by a loan exchange arrangement with the seller. The new loan would now be the obligation of the buyer and the property would be transferred accordingly. In this condition, if the buyer takes a loan facility from the same bank than the property verification and processing time could be saved significantly.

Tax Implication and Profit/Loss Calculation

Selling a property within a 3 years would attract a short term capital gains tax (STCG). In such scenario, the whole profit earned on the invested property would be paired down by the tax implications. However, if the property is sold after 3 years than a Long term capital gains tax would be applied hence the lower rate would be applicable and seller can earn a better return. While calculating gains, the seller should also take into account the interest paid during such period. While wrapping up the loan early, the banks may charge penalty on early closure of the loan. So, tax implications and bank penalty charges are very important factors to be considered while one finalizes to sell a mortgaged property.

About the author:

Author is an MBA (Fin) graduate and a Financial Consultant. He has spent 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at

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