The settlement is the last step in the home buying process, when the lender provides the funds for you to purchase the property and register a mortgage against the title of your new home.
However, it’s possible that you may change your mind about buying a home before the sale is finalised. Perhaps you no longer like the house as much or there’s a change in your financial or personal circumstances. These things do happen and, as a buyer, you have the right to cancel your home loan application any time before the settlement or when the loan is handed over.
Cancelling a home loan before settlement
Even though you have the option of cancelling a home loan before settlement, it is worth going through your home loan agreement to check for any applicable penalties and breach of contract clauses. It is also a good idea to discuss your situation with a solicitor, conveyancer, or any such legal representative to be sure of your options and their consequences.
Talking about penalties, cancelling your home loan and cancelling the sale are two different things. Most sale agreements cater for a cooling-off period following the signing of the contract that gives you time to change your mind about the purchase. Suppose you have signed a contract with a three-day cooling-off period. On the next day, if you decide that the house is no longer right for you, you can terminate the contract within the cooling-off period without being in breach of contract or losing your deposit. That being said, the rules around cooling-off may differ in different states and territories. Your contract might also contain provisions that prevent a change of heart in the days after you’ve made the sale. Therefore, it is important that you read your contract thoroughly before cancelling the sale and also discuss your position with a legal professional to ensure you understand the terms correctly.
Coming to your home loan, if the sale is terminated within the cooling-off period, you can cancel your loan as well - though there may be penalties. You may lose your deposit and might be held in breach of contract if you choose to cancel after the cooling-off period has expired. As always, it is advisable to go through your home loan agreement and seek legal advice to be sure of the penalties and next steps.
If you have decided to cancel your home loan application before settlement, the process is simple. Just call up your lender to inform them of your decision. After you have explained your situation, the lender will proceed with the cancellation and inform you of any possible financial implications. It is advisable to follow up your phone conversation with a letter or email, stating the date and reason for cancellation along with the other details of the agreement. The mortgage should stop once the lender receives written communication from you. You may also keep a copy of this letter in your records for future purposes.
Can I switch lenders during the cooling-off period?
It is possible that you don’t want to cancel the sale, but switch lenders before the property is settled. Perhaps you found a better deal or are simply unhappy with the services of the lender you chose. In this situation, you would need approval from the new lender and may have to pay penalties to the old lender. Also, your sale contract may be contingent upon the finance and terms you had previously secured from your chosen lender. It would be a complicated arrangement and you would need to get advice before going down this path. Another option is to take the loan with the lender who has approved your finance and switch to another lender after the settlement process ends.
Can I cancel a home loan after disbursement?
No, you cannot cancel a home loan after receiving the money. You can get out of the home loan however if you sell off the property or refinance to another lender. If you already own a house and are finding it difficult to make your monthly repayments, you may consider switching to a lower interest rate mortgage to reduce your costs. You can also switch lenders to unlock the equity in your house to pay for renovations or other projects. In any case, it is worth defining your refinancing goal and working out the cost of switching to make an informed decision. A mortgage broker can help you in crunching the numbers and provide you with suitable home loan options for your requirements.