Introduction and Risks Associated with the Transfer with Mortgage for Second-hand Housing

Introduction

On January 5th, 2023, in the midst of the downturn of the second-hand housing market, six Departments of Shenzhen Government jointly issued The Notice of Work Program on Promoting the “Transfer with Mortgage” Model for Second-Hand Houses transaction in Shenzhen ([2023] No.1, Real Estate Construction of Shenzhen Government). Within the so-called “transfer with mortgage” mode, the seller doesn’t have to pay off the loan in advance, but directly transfers the ownership of the house to the buyer, using the buyer’s money to pay the mortgage, which enables the second-hand housing transaction procedure to be greatly simplified.

Transaction Mode

The “transfer with mortgage” mode is the latest development trend under this efficient and convenient policy, should both buyer and seller choose the “transfer with mortgage” mode, they can choose to proceed with either the “Sequential Mortgage” mode or the “Double Pre-Notice Registration” mode . The procedures for each mode are as follows:

1. “Sequential Mortgage” Mode

This mode is applicable to mortgage purchase. It means that the assignor, the transferee and both lending banks can, by consensus, complete the transfer without cancelling the original mortgage registration.

• The parties reach consensus and transfer without cancellation of the original mortgage registration. The mortgagee turns into the transferee

• Complete the Sequential Mortgage Registrate of the transferee

• The registration of the original mortgage will be cancelled upon the transferee’s lending bank lend the money to pay off the assignor’s loan

2. “Double Pre-Notice Registration” Mode

This mode envisions that the assignor, the transferee and the transferee’s lending bank shall first apply for a Double Pre-Notice Registration (namely the pre-notice registrations on the second-hand house’s transfer and on the mortgage), and then the assignor, the transferee and both lending banks shall jointly have their application for the transfer convert from pre-notice registrations to definitive registrations.

• The parties reach consensus and complete the pre-notice registrations on the second-hand house’s transfer and on the mortgage

• The lending bank of transferee deposits into the escrow bank account

• Double Pre-Notice registration turns into the definitive registrations without cancellation of the original mortgage registration

• Settle the assignor’s loan and cancel the original mortgage registration

Pay Attention to Legal and Tax Risks

As a new model, “transfer with mortgage” involves both buyers and sellers, as well as multiple entities such as banks and intermediaries, however this model has not been fully verified in practice. Both buyers and sellers need to pay attention to various legal risks involved in this transaction model, including whether there are prohibitive provisions in the contract and whether there are restrictive conditions in the mortgage. All parties should confirm whether there are any special agreements with the mortgagee and make certain arrangements regarding the payment method of the purchase price to ensure smooth and safe second-hand housing transactions. If encountering such relevant issues, it’s suggested to promptly consult a lawyer to protect the legitimate rights and interests of the parties involved.

Additionally, what are the taxes needed to be paid when buying and selling second-hand houses? Generally speaking, such activities involve stamp duty, deed tax, personal income tax, value-added tax, urban maintenance and construction tax and education fee surcharge, and land value-added tax. Although some of the taxes and fees are borne by the buyer and the seller respectively, in practice, they increase the cost of buying a house as a whole, so the government has introduced many tax exemptions and preferential tax policy for housing transaction between individuals.