Partial discharges: how they can cost you penalty interest

Partial discharges sometimes lead to settlement delays, costing sellers money in the form of penalty interest. In this post, I’ll explain why such delays happen, and what you can do to avoid them.

When there’s a mortgage on the property, it must be discharged by the lender for settlement to occur. This generally takes around 10 to 12 business days, but if the seller needs to have a partial discharge, the process can take longer.

A partial discharge, as you no doubt know, occurs when the seller pays back only a portion of the loan upon settlement, because the lender is using another property (or properties) as equity.

Partial discharges tend to take longer (often around four weeks) because the bank may require a valuation on the remaining properties. If there are tenants in the property, arranging this valuation can be time intensive. In addition, partial discharges usually require sellers to sign extra documentation.

For these reasons, it’s not uncommon for partial discharges to be the source of settlement delays.

For example, a recent settlement case is currently running late because of delays completing the partial discharge. As a result, the seller is facing the prospect of paying hundreds of dollars in penalty interest.

The worst part? This delay could have easily been avoided, had the seller sent their documents back to the bank as quickly as possible. However, they didn’t understand that a partial discharge takes considerably longer than a regular discharge – and as a result, they returned the documentation to their bank at the last minute.

While the onus is on the seller to ensure documents are returned to their lender in a timely manner, agents may wish to help clients to avoid such delays by mentioning that partial discharges tend to take weeks to complete.

To help ensure a timely settlement, sellers should return the relevant documentation to their settlement agent as soon as possible – even before the sale becomes unconditional.

Images by Eric Allix Rogers via Flickr.