Releasing a Mortgage Before Sale: A Worked Settlement Example

When a property carries lending, the sale has a second transaction inside it. This illustrative example shows how the money and the sequence actually work.

Selling a property that carries a charge means two things must happen in a coordinated way: the lender is paid and releases its security, and the transfer to the buyer is effected. If they happen in the wrong order, one party is exposed. This example works through the figures and the sequence for an illustrative sale so the mechanics are visible before you are in them.

The situation

An owner is selling a villa that carries finance from a Saudi lender. A buyer has been found and both sides want to complete within a defined window. The owner needs to understand what the lender will require, what will be left after settlement, and what has to happen in what order on the day.

Assumptions (illustrative)

• Agreed sale price: SAR 3,200,000 (illustrative).
• Outstanding balance on the facility: SAR 1,450,000 (illustrative).
• Assumed early settlement amount payable to the lender in addition to the balance: SAR 38,000.
• Assumed selling costs including agency and adviser fees: SAR 96,000.
• Published headline Real Estate Transaction Tax rate of 5 per cent, to be confirmed with ZATCA, applied here to the sale price for illustration.
• Assumed outstanding service charge and utility balances: SAR 14,000.

Step 1: Establish the full amount required by the lender

Outstanding balance of SAR 1,450,000 plus an assumed settlement amount of SAR 38,000 gives SAR 1,488,000 payable to the lender.

The figure that matters is not the balance on your statement but the amount the lender requires to release its security, confirmed by the lender in writing and valid to a stated date.

Step 2: Calculate the transaction amount on the sale

At the published headline rate of 5 per cent applied to SAR 3,200,000 for illustration, the amount is SAR 160,000. The responsibility for it and its precise application must be confirmed with ZATCA and set out in the settlement statement.

This is one of the largest single lines in the settlement and it has to be agreed between the parties in advance rather than discussed on the day.

Step 3: Build the full settlement statement

From SAR 3,200,000, deduct SAR 1,488,000 to the lender, SAR 160,000 for the transaction amount, SAR 96,000 of selling costs and SAR 14,000 of outstanding balances. That totals SAR 1,758,000 of deductions, leaving SAR 1,442,000.

The seller nets about SAR 1,442,000 against a headline price of SAR 3,200,000. Sellers who plan around the headline figure are planning around a number roughly 55 per cent higher than what arrives.

Step 4: Sequence the money on the day

The buyer funds are applied so that SAR 1,488,000 reaches the lender and the charge is released, and the transfer to the buyer is effected as part of the same coordinated sequence, with the remaining SAR 1,712,000 of the price applied to the other settlement items and to the seller.

No party should be exposed in a gap. A buyer who pays before release owns a property with someone else security on it, and a lender paid after transfer has lost its security before being paid.

Step 5: Test what happens if the settlement figure expires

If the lender figure is valid to a date and completion slips past it, a revised figure is required. If the additional amount were an assumed SAR 6,000, the seller net falls to about SAR 1,436,000 and the whole sequence must be re-coordinated.

Settlement figures are time limited, so a delay is not only a delay. Build the validity date into the completion timetable rather than discovering it on the day.

Step 6: Check the seller position if the price is renegotiated

If the buyer reduces the price by SAR 150,000 to SAR 3,050,000, the transaction amount at the headline rate falls to SAR 152,500, but the lender still requires SAR 1,488,000. Seller net falls to approximately SAR 1,299,500, a reduction of SAR 142,500.

A price reduction hits the seller almost pound for pound, because the lender settlement is fixed. A seller with high leverage has far less room to concede than the headline price suggests.

What changes the answer

• If the outstanding balance were SAR 2,400,000 rather than SAR 1,450,000, seller net falls to about SAR 492,000 and almost any price concession becomes unaffordable.
• If no early settlement amount applied, the seller nets about SAR 38,000 more and the sequence is simpler.
• If selling costs were SAR 60,000 rather than SAR 96,000, net proceeds rise by SAR 36,000.
• If completion slipped by a month and the service charge and utility balances grew by SAR 3,000, the net falls accordingly and the settlement statement must be reissued.
• If the property were sold with a tenant in place and a deposit had to be passed to the buyer, that amount would be a further deduction from the seller proceeds.

What the numbers tell you

• The lender requirement is a written settlement figure with a validity date, not the balance on a statement.
• Build the full settlement statement before agreeing a completion date, not afterwards.
• Payment, release and transfer must be a single coordinated sequence with nobody exposed in a gap.
• A price concession is absorbed almost entirely by the seller, because the lender figure does not move.
• High leverage removes negotiating room long before it creates a problem with the lender.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira works on the ownership side of a Saudi property for owners based abroad: verifying title and boundaries, assessing the building, handling registration and handover, and managing the asset afterwards. For legal and tax questions, work with a licensed adviser; Domira will tell you plainly what the property itself supports.