Can You Sell A Home With A Mortgage?

In a quick answer, yes! But, keep reading to discover tips and important considerations to think about when selling your home if you have a mortgage.

 

5 Key Steps Before Selling Your Home With A Mortgage

1. Determine Your Home’s Equity

The equity amount in your home is the difference between the market value of your home and your outstanding mortgage balance. For instance, if the market value of your home is $750,000 and you have an outstanding mortgage loan balance of $300,000, then your home’s equity would be $450,000.

 

It’s important to point out that this is under the assumption that you don’t have any other liens on your home. Also, the equity amount is before any real estate commissions, taxes, or additional fees like lawyer or notary fees have been deducted.

 

As a first step, it’s a good idea to reach out to your mortgage broker, bank, or mortgage lender to see if you’ll have to pay any prepayment penalties. This number can be in the thousands so it’s good to know ahead of time so that there aren’t any surprises at the closing table.

 

A prepayment penalty occurs when your mortgage lender charges you a fee if you break your mortgage contract or pay your entire mortgage before the end of your term.

 

This includes when you sell your home. The amount of your prepayment penalty will depend on the outstanding balance of your mortgage, your interest rate, and the remaining term of your mortgage.

 

If you need to clear a certain amount of money from the sale proceeds, it’s best to get an idea of your sale proceeds before you put your home on the market.

 

A few common, more significant expenses for home sellers include real estate commissions, prepayment or mortgage penalties, and applicable taxes like GST and capital gains tax.

 

 

How Do You Build Equity?

You can gain equity in your property through earned equity or market equity. Earned equity is achieved over time from your monthly mortgage payment.

 

At first, it may not seem like you’re making a dent in your mortgage, especially at the beginning, but each time you pay your monthly mortgage, you’re paying off some of your principal and reducing your mortgage balance. The benefit is that over time, more of your mortgage payment goes towards your principal instead of interest while your remaining balance decreases.

 

You can also gain equity in your home by increasing your home’s value through home improvements. Some examples can be finishing an unfinished basement to turn it into a rental suite or updating the kitchen and bathrooms.

 

 

Market equity is when your home value rises or decreases depending on the real estate housing market. For instance, if in today’s market, your home is worth $750,000, but you bought it a few years ago for $500,000, then that $250,000 increase in your home’s equity is based on the real estate market.

 

There’s also forced appreciation, and that is when you purchase a property and add value to it. For instance, if you buy a single-family home and update the kitchen or you turn an unfinished basement into a finished rental suite. Through these updates, you’re increasing the value of the home to potential homebuyers.

 

2. Make Sure Any Additional Liens Are Paid Off

Liens can include a second mortgage like home equity loans or a home equity line of credit.

 

3. Factor In Transaction And Closing Costs

Your lawyer or notary will deduct the remaining expenses after any liens have been paid off from the sale proceeds.

 

Common seller expenses include real estate commissions (for both the buyer’s agent and listing agent), utility adjustments, taxes like capital gains tax or GST, lawyer or notary fees to prepare the conveyancing, and any moving expenses.

 

I wrote a blog post about the 7 Common Costs When Selling Your House if you’d like more information about the transaction fees when selling your home.

 

Your real estate lawyer or notary will prepare your statement of adjustments to get the exact amount of the sale proceeds. Overall, the sale proceeds cover your selling expenses and pay off your mortgage on the property. Anything left over is your profit.

 

I’ve included an example below for a home that sells for $750,000 that is someone’s principal residence. These numbers are approximate, and there is no standard commission, but this will give you an overall understanding.

 

For Example:

Home sale price: $750,000

Subtract: Remaining mortgage balance: $300,000

Subtract: Real estate agent commissions (buyer’s agent and listing agent): $25,500

Subtract: Lawyer or notary fees: $1,500

Net sale proceeds: $423,000

 

4. Determine Your Selling Price

Once you’ve decided that you’re ready to sell your home, the next step will be to contact a real estate agent to determine your home’s value.

 

Your real estate agent can prepare a comparative market analysis (CMA) to determine a list price range for your home based on active, pending, and recently sold comparable homes in your neighbourhood.

 

 

5. To Sell Or Not To Sell

Selling a home with a mortgage is very common and home sellers decide to list their property for a variety of reasons. Job relocation, downsizing, and upsizing are just a few.

 

Unless you’re in a situation where you have to sell quickly for personal reasons, if it doesn’t make financial sense to sell, a home seller may choose to wait until the market shifts to a more balanced or seller’s market.

 

But, if you do want to sell your home and it makes sense financially, then it’s time to get your home on the market! Make sure there’s enough money in the property, and that it’s the best option for you. That’s why it’s great to review your financial situation with your bank or mortgage broker before you put your home on the market.

 

What If I’m Selling A Home That Isn’t My Primary Residence?

If you’re selling a home that isn’t your primary residence, then you may have to pay capital gains tax. If your home is an investment property that you use for short-term rentals, you may also have to pay GST.

 

Before selling your investment property, it’s a good idea to chat with an accountant about tax strategies and to become familiar with what costs you may have to pay when selling your investment property.

 

What If My Home Sale Doesn’t Cover The Transaction Fees And Outstanding Mortgage Balance?

For instance, let’s say you purchased a home two years ago for $750,000, and you want to sell it today, but the market has gone down, and now your home is only worth $650,000.

 

If you decide to sell it at the current value, then there’s not enough equity in your home (negative equity). In that case, you’ll have to pay the money to your lender, real estate commissions, and other selling costs out of pocket.

 

Who Is Responsible For The Monthly Mortgage Payments While Your Home Is On The Market?

You (as the seller) are responsible for your mortgage payments until the completion date. The completion date is when the property title legally changes from the seller to the buyer, and the seller receives the sale proceeds. The completion date is also known as the closing date.

 

The time a home takes to sell will depend on the current real estate market. Your final mortgage payment will depend on the payment frequency of your mortgage payments (bi-weekly, monthly, etc.) and when your home closes.

 

Your real estate lawyer or notary will prepare your statement of adjustments so that you know exactly what the sale proceeds are and any transaction fees due at closing.

 

The statement of adjustments will include an itemized list of expenses deducted from your sale price to determine your net proceeds. 

 

Selling a home with a mortgage is very common but it’s important to check with your mortgage broker, bank, or lender to determine what (if any) your prepayment penalty amount will be for paying off your mortgage loan early. Determine if it’s the right time to sell for you and if it is, then it’s time to contact a real estate agent to go over the home selling process.

 

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