Is selling a house with a mortgage an option for Canadian homeowners? The short answer is yes. Selling a house with a mortgage is indeed an option, and there are cases where it can be financially beneficial to do so. Here’s how this process works and when you should consider this method of selling a home.
Can You Sell a Home with a Mortgage?
Yes. Even if your home currently has a mortgage on it, you can sell it. In fact, most people don’t own their homes outright, so selling a house with a mortgage is standard practice. Homeownership has changed a lot over the past few decades. Nowadays, most people do not live in one house all their lives; instead, they upsize and downsize several times. Typically, this means they don’t own any one home long enough to pay off the mortgage in full before selling.
However, selling a house with a mortgage will have administrative and, potentially, financial implications. If you’re considering selling before your current mortgage term expires, you must prepare for the process.
How to Prepare to Sell a Home with a Mortgage Step-by-Step
Selling a home with a mortgage is a simple enough process, but you do need to gather some vital information before you proceed with the sale. These are the steps you’ll need to take.
1. Get a Payout Quote
First, you must contact your mortgage provider for a payout quote. The payout quote will show you what you currently owe on your mortgage. This quote will include the remaining loan amount, any fees, and the amount in interest payable between the issuing of the payout quote and the expiration date of the quote.
Take care to note down the expiration date on the quote. You’ll have to get a new one if it expires.
2. Determine Penalties for Breaking Your Mortgage Term (If Any)
If you have a closed mortgage contract, you will be charged a penalty fee for breaking the contract (i.e., selling before the mortgage term expires). Your fee depends on whether you have a fixed-rate or variable-rate mortgage. Fixed-rate mortgage holders will pay a penalty that is the greater of the interest rate differential (IRD) or three months’ interest. If you have a variable-rate mortgage, you just pay three months’ interest.
If you aren’t sure what the penalty will be for paying off your mortgage early, call your lender and ask.
Alternatively, you may look into transferring your mortgage to your new home, which is called mortgage porting. Or, the buyer of your current home may agree to assume the existing mortgage. This is a good option for the buyer when the interest rate on your current mortgage is low. However, remember that this option will only work if the buyer qualifies for your mortgage.
3. Determine Your Home Equity and Net Proceeds
Determining your home equity is vital when selling a house with a mortgage because it tells you how much you may profit from the sale of your home. Home equity is the difference between the current market value of a house and the outstanding mortgage balance.
Working out your home equity is very simple. First, you’ll need to know your home’s accurate, current value. To find your home’s value, you can use an online home valuation calculator, or consult a real estate agent. Next, you’ll need to know the total amount owed on the property. You can usually find this information in your lender’s online portal or by calling them to ask.
To calculate your home equity, subtract any amounts (including mortgages and home equity lines of credit) owing from the property value.
Home equity = Home value – outstanding debts like mortgage and home equity line of credit
Next, you’ll need to consider the fees associated with selling your home. When you sell your home, you’ll pay a variety of costs, including:
- Lawyer fees: $500 to $1,500
- Real estate agent fees: 3% to 7% of the sale price
- Mortgage discharge fees: Up to $700
Subtract these fees from your home equity, and that amount is what you can hope to profit from the sale.
4 Steps to Selling a Home with a Mortgage
Congratulations, you have sold your home! If you’re selling a home with a mortgage, you must take the following steps after the sale.
1. Pay Off Your Mortgage
First, the money from the home sale will be used to repay the remainder of your current mortgage. You’ll also need to pay any fees and penalties the lender requires.
2. Pay Any Other Loans or Liens
Now, the remaining money will be used to pay off any other loans or liens associated with the home. These include home equity loans or second mortgages, where you borrow money using the equity you have in your home as collateral.
3. Pay Transactions and Closing Costs
Finally, pay off any costs associated with the closing of the sale. Typically, the seller takes on the responsibility of paying the real estate agent fees from the proceeds of the sale.
4. Deposit Your Remaining Funds
What’s left is your profit. You may use the profits of your home’s sale in any way you wish. For example, you may use these funds to buy a new home.
Selling a Home That Is Underwater
A home that is underwater is a home in negative equity. This means that the amount you owe on the mortgage is greater than the home’s current value. In this case, the house sale won’t cover the remainder of the mortgage. There is a way out: asking your lender to approve what’s known as a short sale. Your lender will then allow you to sell your home even though they won’t get all their loan back. A short sale is less traumatic than a foreclosure but will affect your credit score and future mortgage applications.
Capital Gains and Your Home Sale
Capital gains tax is not levied on Canadian home sales where the home was your principal residence for every year you owned the home. If it wasn’t your principal residence or wasn’t your only principal residence, or you rented out the home at any time while owning it, capital gains tax may be due. You should research the exact circumstances of your home sale and always report the home sale, even if no tax is due.
Selling A House With A Mortgage: A Final Word of Encouragement
Selling a house with a mortgage is relatively straightforward. Do a bit of preparation in advance, know your numbers and your home sale should go smoothly, hopefully leaving you with a bit of profit once all the costs are covered.
