Selling your home is a whole different story than buying. From staging to realtors and lawyers, there is a lot of preparation and cost behind making that successful sale. For homeowners looking to sell their home shortly after buying it, the process usually ends in a financial loss.
How soon can you sell a house after buying it? In Canada, you can legally put your home up for sale the day after you receive your keys. Just because you can, though, doesn’t mean you should. If you’re considering selling your home right away, whether due to emergency circumstances or taking advantage of a seller’s market, you should be aware exactly of what you’re getting yourself into.
Most Canadian mortgages have a 25-year amortization with mortgage terms of around five years. Breaking out of your agreement early to sell can be costly.
- Capital Gains Taxes. If you are planning on flipping a home and do not live in the property, the profits you make are considered taxable income. The taxes owing from the sale of the house could very well negate selling it in the first place. Consult with a tax professional or accountant to find out how much you could stand to owe.
- Mortgage Prepayment Penalties. Read your mortgage agreement carefully to determine how much your lender is going to charge you to break your contract. In most cases, they require you to pay 2-5% of the remaining balance on your loan. The longer you stay in your home, the smaller this amount will be as you gradually pay down the principal amount.
- Buyer Concern. Real estate agents and buyers will be able to easily find out when the house was last on the market. This could negatively impact the demand for your home as buyers often assume something is wrong with it. Work with a real estate agent to help mollify their concerns and be sure to list your home at a reasonable price to still maintain some sort of appeal.
- Additional Fees. In addition to prepayment penalties, you may also be subject to administration, appraisal, mortgage discharge and reinvestment fees. If you have a cash-back mortgage, you may also be required to pay that all back as well.
Selling Your Home to Make a Profit
Unless in exceptional circumstances, most sellers will need to stay in the home for at least five years. This gives them enough time to recover from transaction costs from purchasing the home, putting a sizable amount of money against their mortgage, as well as giving you time to make improvements and allow the market value to grow. Lenders design mortgages to make the most money in the first few years. This means your first monthly payments will be primarily towards interest and not your principal. It means committing to a much larger prepayment penalty for selling a house before 1 year in Canada. That being said, if the seller market is hot, you got the place as a result of a short sale or foreclosure, or suddenly the home’s value shot up due to neighbourhood development or your own improvements, you may be able to swing a profitable sale after a mere two years.
Let’s say that making a profit is not your top priority. Perhaps you’ve taken a job in another city, you’re going through a separation, or there is some other time-sensitive reason you need to get this mortgage off your hands. In these cases, your next best option is to try to break even. Your break-even point will vary depending on your unique circumstances, so it is important to work with a mortgage professional to calculate what you stand to lose and gain through an early sale. Add together your down payment, closing costs, and monthly mortgage payments made to date. This is the amount you want to be able to make back. Add up all the costs you stand to pay to sell your home. Then determine how much equity you’ve built up. Finally, calculate a realistic listing price for your home with the understanding that buyers may be a little shy without realtor intervention. Take a look at those numbers. What is the lowest price you could sell your home for and still break even?
Even if selling your home within a few years of buying it wasn’t in the cards, sometimes things happen and you’re forced into a change of plans. When this occurs, you should have the knowledge you need to make the best possible financial decision, even if that means just minimizing your losses. As professional mortgage brokers, our highly skilled team members can help you decipher your current mortgage contract and crunch those numbers. Contact us today and let’s get started!