If you have already purchased your first home and are looking to sell it, either to downsize or upgrade, odds are there is some comfort knowing that you've been through the process before. While some previous experience can help you in the preparation for your big move, you need to look into several other factors – details of selling your existing home, requalifying for a new mortgage, new regulations, and land transfer taxes are just some of the current realities of the Toronto real estate market.
The good news is, there are tips and guidance to help you through every step of the process. Carrie Davidson is a Mortgage Agent with over 15 years of experience in the industry. Here are her top five tips to help you through the process of selling your old place, signing on the dotted line, and moving into your new home.
It's Different From Purchasing Your First Home
Many people don't realize that the process of buying and selling at the same time is very different from buying your first home when the down payment is coming from RRSP's, savings, or a gift from family. Carrie says:
When we own a home, most of the down payment for the next one is in the home that is being sold. It is crucial for me as a mortgage professional that I develop a step by step strategy where clients understand each detail and feel comfortable with the process.
Carrie adds that a big misconception many people have is the belief that they can simply port or move their existing mortgage to a new property without going through the re-qualification process – and with the new rules now in place. Even existing mortgage clients need to provide documentation including proof of income, employment, and healthy credit scores to prove to lenders that they can afford the mortgage for their new home.
Carrie also notes that recent rule changes from Canadian Mortgage Insurers (CMHC, for example), are particularly important to those who are moving or upgrading to a larger home in Toronto where the average cost of a home is high. Recent numbers released from the Toronto Real Estate Board state that the average price for a detached home in Toronto is nearing 1.3 million dollars. Since the CMHC no longer insures home purchases priced over 1 million dollars, which isn't hard to hit in the city, buyers must have a minimum down payment of at least 20 percent towards their purchase.
Know What You Need To Budget For
Creating a realistic budget, including some wiggle room for unexpected expenses, is key to the successful sale and purchase process. There are many items that need to be taken into consideration. If you are working with a new bank or mortgage lender for the purchase of your new home, there is often an associated penalty you must pay to break the mortgage on the home you are selling.
It's always a good idea to know that approximate cost as, when the property being sold closes, the mortgage and penalty are paid off in total from the proceeds of the sale.
Carrie also notes that the realtor fees are taken from the sale property, and not the one being purchased. This means that it is wise to calculate the realtor commission from your expected sale equity (including HST) and add it to your budget.
Municipal land transfer taxes were first instated in 2008 and are dependent on the purchase price of the newly purchased home and its location. Land transfer taxes are calculated differently for repeat buyers than first time buyers. For example, properties with a value of greater than $400,000 will be charged a two percent land transfer tax, homes with a value exceeding two million dollars will pay 2.5 percent – calculate your Land Transfer Tax here.
The land transfer taxes should be included in the bridge financing piece of the mortgage, to have those funds available at your lawyer's office to successfully take possession of your new home and not be caught short of funds!
Carrie also adds an additional tip for those considering downsizing:
Even though my clients are very happy to have no mortgage at all, I advise that it's a good idea to put a secured line of credit on their new home even if they never touch it. Doing this helps to protect against mortgage fraud, by having the HELOC (home equity line of credit) registered to the title. And, if a new roof or a small renovation is required over time, the equity in the home is available to draw on and pay down or off very quickly.
Understand New Mortgage Rules & How They Will Impact You
Assuming some time has passed since you last purchased or sold a home, odds are new mortgage rules have been implemented since. Hiring a mortgage professional to help guide you will allow you to get an up to date education on both the selling and buying process in order to set realistic expectations.
Speaking of the new government-mandated mortgage rule changes, many clients don't fully understand that the new rules create a very different borrowing landscape from when they bought their first home.
Changes in employment, such as taking on a new job or working freelance, maternity or parental leave, and retirement will all impact qualifying for a new mortgage on a new home. This and additional requirements means increased documentation is needed to get mortgage approval. As Carrie cautions:
For example, 10 years ago there were banks and lenders that accepted stated income especially for self-employed Canadians, but today, those types of programs are scarcely offered, and if they are it would likely be through an alternative lender where interest rates could be higher and the terms and conditions more restrictive.
Since the equity most homeowners will use to pay for their new home is dependent on the sale of their existing home, working with a qualified mortgage professional is key.
It is important that there's a comprehensive plan in place for clients to understand the buy/sell process. This may include setting up a home equity line of credit (HELOC), if necessary before their home goes on the market. This is a good strategy if the sellers do not have savings or available equity (cash). The HELOC can be also very helpful to use some of their current home's equity for minor repairs, staging, and perhaps even a deposit made with the offer on their new home when they're ready.
When The Closing Dates Don't Match
Timing, particularly when it comes to finances and logistics, is key to the successful transition from selling one home and buying another at the same time.
For example, if the possession dates aren't on the same day then there is bridge financing required. This allows clients to 'borrow' the down payment from a bank/mortgage lender selected for the new home when so much equity is tied up in the home that clients sell. This way there can be a period where the clients own both homes.
In terms of obtaining bridge financing, there are details that must be managed:
Both the sale and purchase agreements must be firm with no outstanding conditions. Also, the cost is often less expensive than people think – for example, bridging $300,000 of equity will cost approximately $75/day based on today's rates.
A Team Of Experts Is Worth Its Weight In Gold
Having the right team of people to help you through every step of your selling and purchasing process will save you time, money, and stress in the long haul. Carrie recommends forming a professional team including an experienced realtor, lawyer, home inspector, appraiser and mortgage broker who communicate with each other and the clients around the timing, costs, compliance and documentation required throughout the process from beginning to end. Carrie adds:
The team can make or break the experience for the clients. Things don't always go smoothly, however knowing that each member of the team will step up to resolve issues is very important. The transitions of the buying and selling process should be seamless for our clients!
Contact The Julie Kinnear Team and start the process of selling your home TODAY. We are here to Guide and Protect our Clients and Families.