The selling price of your home is one of the most important financial decisions that you and your buyer will need to agree on. Keep in mind, however, that there are other factors that could impact your decisions during the whole selling process. Your De Laat realtor, lawyer, lender and accountant are valuable resources when it comes to explaining each of these in detail.
Discharging your existing mortgage
When selling your home it is imperative that you understand the terms of your current mortgage. Documents should be reviewed and meetings should be arranged with your lender to discuss options. A signed mortgage verification form needs to be provided to your De Laat realtor which gives them permission to verify the terms and conditions in your mortgage.
A common practice is to use the funds from the sale of your current home to pay off, or “discharge”, your mortgage loan. Before doing so you need to know if you have a fully open, or fully closed, mortgage. An open mortgage allows you to pay it off at any time without any penalties. On the other hand, a closed mortgage means that you will incur penalties (usually several months interest) if you pay it off before the term ends.
There are ways to mitigate these penalties. One of them is to allow your buyer to “assume”, or take over, your mortgage. Another is to utilize a portable mortgage and apply it to your new home, or, you can time your mortgage term to end around the same time that you sell your current home.
A portable mortgage is just what the name implies. When you sell your current home you can move your mortgage and use it to finance the purchase of your new home. This can be very beneficial to you especially if your current mortgage is at a rate below current market rates. If your new home requires additional funds then these are usually borrowed at current market rates.
Here’s an example of how mortgage portability works:
Assume you sold your home which currently carries a 3 year, $50,000 mortgage at 7% with two years left on the term. Your new home will require a $75,000 mortgage. By utilizing the portability feature on your current mortgage, you would continue using your 7% mortgage for the first $50,000 on your new home, and arrange for the remaining $25,000 at the current market rate of 8.5% for the same two-year term. Your bank will combine the two rates and mortgage amounts and would come up with a “blended” payment of 7.5%.
This option on your mortgage will allow you to borrow additional funds at rates lower than current market rates for the next two years. Another huge advantage to using this feature is that you can avoid considerable penalties in discharging a closed mortgage when selling a home.
Offering an assumable mortgage
When a buyer “assumes” your mortgage they are agreeing to take your existing mortgage and assume responsibility for it as part of the price they’re paying for your house.
For example: Assume you plan to purchase a house for $150,000 and the seller currently owes $110,000 on his mortgage. You could pay the seller $40,000 in cash and assume his $110,000 mortgage. In the end you still end up paying $150,000 (plus interest) but you didn’t have to arrange financing from another source to complete the purchase.
Some sellers use an assumable mortgage as an incentive to potential buyers especially if their interest rate is lower than current market rate. However in some cases, this is not automatic as purchasers must be qualified by the lender before they can assume the mortgage.
As a seller you can also benefit from an assumable mortgage. If you’re locked in to a closed mortgage with several years remaining on its term, significant penalties may be imposed for it to be discharged. You can avoid those penalties by getting your buyer to assume your mortgage.
There is a very vital piece of information you need to keep in mind when offering your mortgage up for assumption. In Ontario, the law states that your name will not be removed from the mortgage documents until the load is repaid completely. This means that if the buyer defaults on the mortgage, the lender can pursue you for payment.
Your De Laat realtor will be able to review your mortgage terms and advise whether or not mortgage assumption can be listed as a feature in the Listing Agreement.
Taking back a mortgage
Equity in a property is the home’s current market value less any outstanding loans. When you own your home for a number of years it allows you to build up a large equity having paid off a large portion of the mortgage. Some sellers help their buyers by “taking back” a mortgage. This means that the seller will loan money to the buyer from their home’s equity, thereby financing a portion of the purchase. This arrangement is commonly known as a “seller take back” mortgage.
Here’s an example of how a “seller take back” mortgage works:
Suppose you found a property that has a sale price of $200,000 and the owner does not have a mortgage on it. Your bank qualifies you for 75% financing but you are unable to come up with the funds for the remaining 25% ($50,000) down payment. The seller can help you by agreeing to “take back” a one-year mortgage for $20,000 so in the end you would only have to come up with $30,000 in cash for the down payment.
A buyer’s market occurs when the supply of homes exceeds the demand. Taking back a mortgage can help make it more saleable, especially in a buyer’s market. By adjusting the payment terms of your loan, you can sometimes even help buyers qualify for mortgages through some lending institutions. After the sale you can find a company that will purchase the equity loan from you if you find yourself needing some additional cash.
As with everything, there are pros and cons that should be considered. This is a very complicated procedure and the arrangement of the terms should be left to the professionals. Your De Laat realtor and lawyer would be able to help explain all the facts to you before it is offered to potential buyers.
Interim financing may be considered if you’re planning to purchase a home before your current one has been sold. This type of financing can involve any type of temporary loan arrangements until a permanent mortgage is in place.
One form of interim financing is called Bridge financing. With this type of financing you can borrow an amount equal to (or less than) the amount you’re expecting your current home to be sold for. You can then use these borrowed funds to purchase your next home. After your current house is sold you then use the proceeds of that sale to repay the temporary loan plus any interest charges. You must have a firm sale on your existing residence.
Bridge loans can be very useful in accessing some of your home’s equity when you want to build a new home or make certain repairs to your property as a condition for sale. Talking to your De Laat realtor, lawyer and lender will provide you with the alternatives available to you through this type of financing.
Tax implications of selling your home
When selling your primary residence you do not have to pay tax on any capital gains (the increase on your home’s value). This may not be the case however when selling a vacation or rental property. You’re advised to talk to your accountant since legislation in 1992 may have changed those rules.
Fees for professional services provided by your DeLaat realtor and lawyer are subject to the Goods and Services Tax (GST) and you are obligated to pay those.
There are other tax implications that may apply to your specific situation, but those are beyond the scope of this document. Your lawyer or account would be more qualified to advise you.
Estimating the proceeds from your sale
When selling your house you would naturally want to know how much money you’ll have once the sale is complete. Your DeLaat Realtor, lawyer, and accountant can provide precise figures, but here’s a handy worksheet to help get you started: