When you are selling your current home and buying another, mortgage financing can be a bit more complex than when you were a first time home buyer.
Do I Need to Sell First?
The first question to answer is whether you can qualify for your new purchase before the sale of your current home. For this to be an option, you must have enough down payment and be able to qualify for the purchase of your new home while continuing to carry the cost of your current home. If you can’t afford or don’t feel comfortable carrying two homes, you need to sell your current home first. Once you have a firm sale (condition-free offer) on your current home you can use the equity from that home towards the down payment on your purchase. If you take possession of your new home before the sale of your current home is fully complete, you can use bridge financing (short term loan from the lender) for the gap in time.
How Will the Mortgages Work?
Once you’ve determined your options from a qualifying standpoint you’ll also want to understand what, if any, mortgage penalties you would pay to break your current mortgage. This will factor into your decision between the following:
Port Your Mortgage – If the prepayment penalties are high, you may choose to port your current mortgage over to your next property. If you need more money than your current mortgage balance to purchase the next home, your lender will port your mortgage and provide new financing for the “new money” you require. Generally this is done with a blended rate. Most mortgages in Canada are portable, but some low-rate value mortgages are not. If your mortgage isn’t portable, you will have to break it and pay the penalties. Penalties vary but can easily reach $10,000. Call early to find out your penalty and if porting is available on your mortgage.
New Mortgage – You can set up new financing for your new mortgage. This allows you access to the best rates available and broader product choice. Even if you have significant prepayment fees to break your current mortgage, breaking it may still save you money. Depending on the rates quoted by your current lender for a port and blend, you may still save by paying the penalties and starting with a new, lower interest rate.
How Much Down Payment Do I Need?
When you are purchasing a primary residence you generally need just 5% of the purchase price plus closing costs.
Pre-approval is just as important the second time you purchase. A mortgage professional can help you understand your options and work out the best solution. Yes, selling and purchasing has more complexities, but the right professionals at your side can simplify the process.