You can sell your home before 5 years, or soon after purchasing the home without keeping it for long. There is no 5-year rule for selling a house soon after buying it. While there is no rule, there may be penalties for breaking your mortgage term when selling your home.
While most people buy homes with the intention of keeping it long-term; that is not always the case for everyone. Your life can change in many ways. A new job, children, family requirements and finances can all cause you to look for another home or neighborhood.
There is a misconception out there where many homeowners believe there is a 5-year rule for selling a house. The reality is that there is no such rule. In fact, some people wonder if “can you sell a house within 6 months of buying it?”. The short answer is, yes. Some people sell their homes within months of purchasing it.
If you’re wondering how soon can I sell my house after purchase in Canada – the simple response is, within days. While you can sell your home anytime, it’s important to realize there are costs associated with selling your home early.
You may have heard of a penalty for selling your home early. These are penalties levied by the bank or lending company. In addition to these penalties, there are costs that the seller may have to eat up.
Let’s see a real life example of what selling your home early looks like.
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Selling a House Shortly After Buying
In our example, let’s say a couple purchases a single family home in the Cote-des-Neiges neighborhood of Montreal, Quebec for list price $566,000. Here’s a rough estimate of what the deal may look like for the buyer.
Notary Cost: $1100
Home Inspection Cost: $700
Land Transfer Tax/Welcome Tax: $7320
Insurance Cost: $125/month
Moving Cost: $450
These transaction and home buying costs associated with the purchase total $9695. This doesn’t include any sunken costs that the couple may have spent for renovations, upgrades, painting, etc. When the couple sells the home within the first 6 months, they haven’t lived in the house for long enough to make use of the $9695. Additionally, the home hasn’t had enough time to increase in value to properly recuperate these costs either (in most cases).
Let’s now consider the mortgage penalty for selling your home early. This penalty will depend greatly on the term of your mortgage. There are 1-year, 2-year, 3, 4 and 5-year terms. The mortgage penalty is different for variable rate mortgages and fixed rate mortgages. Let’s look at both below.
Fixed Rate Mortgage
Under a fixed rate mortgage, your interest rates are fixed for the mortgage. If the market interest increase or decrease, there will be no change to your mortgage payments. The penalties are higher for fixed rate mortgages because they are the higher of two things: the interest rate differential and three months interest cost.
The interest rate differential will be used in cases where the current market rate is lower than your contract interest rate, or if you obtained your mortgage before five years ago.
The three month cost of interest expense is straightforward. However, the interest rate differential can be one of three types. Most Canadian lenders use either a standard, discounted or posted interest rate differential – all of which can produce different penalties for the homeowner.
Discounted Interest Rate Differential: This is a method used by most Canadian banks. This method takes into consideration a few critical rates. The lender will consider your interest rate as per your mortgage agreement, any discount provided to you on your interest rate and the current interest rate for the term remaining. For example, let’s assume the following for a 5-year mortgage you signed for in 2019. It is now 2021.
Your Contracted Interest Rate: 3.25%
Discount Received: 2.5%
Term Left: 3 Years
Current Rate for 3 Year Term: 3.35%
Mortgage Balance: $394,000
The lender may choose to use one of the following:
Your contracted rate (3.25%), your contracted rate minus discount (0.75%), the current market rate for a 36-month term (3.35%) or the current market rate minus discount (0.85%).
Example of Penalty Calculation: $394,000 x 3.35/100 x 3 years = $39,597 under the IRD method. As this method provides a higher penalty for the bank, they will likely opt to charge the homeowner with this penalty.
Posted Interest Rate Differential: This is when the bank or lender uses the posted interest rate for your term when you signed up for your mortgage. Often times, this can be higher than your current rate under contract. It creates a larger penalty, which is uses to cover a series of transaction and opportunity costs for the lender.
As you can see, selling your house within five years of buying it can be expensive for you, if you obtained a fixed rate mortgage for five years. If you add these penalties with the above mentioned transaction costs – it can get very expensive to sell your home shortly after buying it.
If you think you might be selling your home before the term of the mortgage’s offered, it is advised to obtain a variable rate mortgage (to be confirmed by your mortgage broker). A variable rate mortgage penalty will cost you three months interest costs only.
How Long Do You Have to Keep a House Before Selling It?
You do not have to keep a house for long before selling it, as you can sell it at anytime. Your decision to sell your house will depend on the type of mortgage you have, the transaction costs incurred and reason for selling. While it is not recommended to sell your home soon after buying it – some people may have no other choice.
There are some reasons why some people may consider selling their home to break their mortgage term. These include:
- To benefit from a lower interest rate
- The value of your property increases
- You need to move due to the safety of your area
- You no longer wish to live in the neighborhood
- You are required to move due to work or life changes
To conclude, there are no 5-year rule for selling a house. You’re free to sell your home at any time. When committing to a mortgage term, you need to try your best to think ahead to the next five years. Do you think you’ll be selling your home? Do you think you might need to move? If yes, these considerations should impact your mortgage type (variable vs fixed).
For advice on mortgage options available to you, it is recommended to speak to an experienced mortgage broker.
