Buying a forever home isn’t as common as it used to be. In fact, according to a 2021 Zolo survey, 29% of buyers have already sold their first home. So for most, it can seem less overwhelming to break into the market by buying a starter home and moving to a larger or more expensive home when they have built equity.
But, the question is, how do you know when you’ve been in your home long enough to turn a profit when you decide to sell? Plus, how long should you live in a home, in general, before you sell? Let’s figure out how you can estimate your breakeven point on your mortgage before you cross your fingers and list at the wrong price — or worse — before the financial side of the process makes sense.
What Factors Matter When Deciding if You Should Sell a Home?
Although some of us may already be in our first home and looking to sell, others may be wondering if they buy a property, for how long they can plan to be there. For many people, the reasons behind why they plan to sell are understandable: from needing more space (39%) to realizing they built enough equity (17%) — the emotional side of selling is equally as important.
Either way, knowing the financial side of buying a home and your long-term goals as an owner is essential. To be sure you are on the right track so far, here are some financial factors to consider before you buy or sell a home.
What Is Your Timeline?
Buying a starter home can be an excellent investment, depending on how long you plan to stay. If you’re in a city with a hot real estate market like Vancouver or Toronto, your timeline may not matter as much as it does if you live in a city with a market that fluctuates on a more cyclical basis.
Either way, Robb Engen, a fee-only financial planner and founder of Boomer and Echo, says that although there is no perfect timeline, aiming to stay in a home for at least ten years is an excellent way to build equity before you sell.
“Moving is expensive, and doing it frequently can negatively impact your finances,” says Engen. “I’d much rather see prospective homebuyers wait a little longer to save and then get into a house they can grow into and stay for a longer period.”
Avoid Trying to Time the Market
Whether it’s the stock market or the real estate market, timing the market is never a good idea. Even experts who try to analyze whether we should buy or sell particular investments can’t predict the future. So, although you may think the best plan is to sell a home whenever the market is hot, there is no way to say when (or if) that time will come.
Not to mention, if you plan to buy in the same market you sell, you will deal with higher prices as a buyer. However, Engen says that if you are downsizing or planning to move to a lower cost of living area, that might be the only time selling in a hot market can benefit you.
Choose Your Mortgage Terms Wisely
Perhaps one of the most important financial factors to remember is your mortgage terms. When you buy a home, you’ll need to take on a mortgage with an amortization period typically between five to 25 years. From there, you’ll choose your mortgage rate terms which is a contract that you renew anywhere from six months to 10 years. So, for example, you may have a 25-year mortgage with a 5-year term.
Once you know the terms of your mortgage, you will also need to choose between an open or closed mortgage. An open mortgage provides you with flexibility and the opportunity to pay off your mortgage at any time. In contrast, you can’t pay off a closed mortgage before the end of your term. For this reason, you may be required to pay mortgage prepayment penalties or discharge fees if you sell before this period is up. Keep this in mind when you determine when you plan to sell your home.
How Long Should You Live In Your Current Home Before You Sell?
Now that we know what to look for before buying or selling a home, the best way to calculate whether you will break even or turn a profit before you sell is to do some basic math.
How to Calculate Your Breakeven Point on a Mortgage
There are two significant numbers to know when calculating whether you are at a good place financially to sell your property. First, determine what you currently owe on your mortgage. Second, assess the value of your property in today’s market. From there, you can subtract what you owe from the value of your home.
Let’s look at an example. Say you bought your home in 2016 for $400,000. If the property increased in value according to returns listed on Statistics Canada, averaging 7.5% year over year, your property would be worth around $550,000 in 2021. Perhaps you’ve managed to get your mortgage down to $300,000.
To determine a reasonable sale price, you may also want to consider the closing costs and expenses that come with selling a home, such as real estate commission fees, legal fees, sales tax and any mortgage prepayment or discharge penalties. These numbers will vary depending on your province and what the real estate agents charge.
Using numbers from WOWA.ca and Ontario as our sample province, your closing costs on the sale price of $550,000 would be:
- $27,500 to the buying and selling agent
- $3,575 on sales tax
- $750 in legal fees
Before considering any mortgage fees, you could leave the sale with $218,175 to put towards a new home.
The Longer You Stay In a Home, the Better
Although our example calculation may make selling your home seem like a no-brainer, we need to acknowledge the fact that the stars aligned with every part of the process. From a consistent annual return on the property value to selling for exactly what you put the home on the market for, the math shows us one thing: the longer we stay in our home before we sell, the better.
So, really, though, how long should you live in a home before you sell? In our recent survey, we found that the chance you will return a profit or breakeven in the sale of your home is slightly higher if you stay for more than five years. If you sell your property before the five-year mark, there is still a good chance that you can do well financially, but it may not be worth the risk. If we had only been in our home for four years or less, we would have owed more on our mortgage and less of an increase in the property’s value.
Whether you’re preparing to sell or are just daydreaming about what your life may look like in the near future, it’s never a bad idea to run the numbers and start to plan for what sort of financial situation you’d face when selling your home.
