Buying When Selling
For existing homeowners planning to both buy and sell, there are always many moving parts to consider. Among the factors that need to be weighed: total transaction costs of moving, timing of the purchase, timing of the sale, calculating what equity might be available for downpayment, researching to see if the current mortgage is portable (can be moved from one property to the next), calculating cost/availability of bridge financing, and figuring out what penalties/fees might apply with breaking existing financing - and this is all before choosing the new drapes!
Count Your Chickens Before You Sell The Coop
Financially speaking, most sellers will already have an assumption about what their home is worth long before putting it on the market. Indeed, a good realtor who can produce relevant neighbourhood comparables will be key in this regard. But even if a seller knows what their home might sell for, figuring out the available equity is a slightly more involved task. Evaluating "net" equity can be summarized by a fairly simple equation:
Potential selling price
minus - Realtor fees (4%-6%, depending on the market & service level)
minus - Legal fees
minus - Mortgage penalty & discharge fees (if applicable)
= Net proceeds from sale
A mortgage penalty estimate can be obtained from the existing lender easily via an online penalty calculator or a simple phone call (for starters, here's a pretty good list of lenders). Generally, there will be a discharge fee in addition to the penalty though in some provinces these are capped (in Alberta they are banned altogether). A seller will want to speak with a qualified third-party (we mean us, obviously!) about whether it makes sense to "port" the mortgage, or whether paying the penalty and starting anew is the better option. This math is pretty straightforward.
Knowing the available equity is a very important first step, because this will be the basis for a lot of the decisions that follow.
The "Ideally We'd Like To..." Plan
Once a move is deemed to be financially feasible, the next step is to think about how the purchase and sale might ideally sequence. Generally, a homeowner will already have an idea of whether they are in a 'buyer's', 'seller's' or 'balanced' market and this will usually determine what timing strategy to employ. In a "buyer's market", it makes sense to sell first and only consider buying after; conversely, a "seller's market" generally means that the new purchase should be the first transaction, since there may be a lengthy search before getting a new home under contract (and the subsequent sale is all but guaranteed).
Its important to remember that, regardless of whether the purchase or sale is contracted first, the closing dates can be set/adjusted whenever all parties agree. To this end, many buyers/sellers will aim to own both new and old homes for a short period of time. This will allow them to clean, paint, and upgrade homes where needed, or just to move in a more relaxed way; Where this overlap is desired, bridge financing is usually required.
In the simplest terms, bridge financing is a short-term loan for the downpayment on one home from the subsequent sale of another. This loan is arranged only when a 'firm' (unconditional) agreement is in place for the home being sold. Depending on the amount of the bridge loan, the new mortgage lender may require that a second mortgage is secured on the home being sold to protect the equity they are lending against. A registered bridge loan will carry a higher legal fee.
Every lender will have their own set-up cost for bridge financing (in general, ranging from $200-$500), as well as a a daily interest cost (again, this will vary considerably lender to lender). Here's an example bridge scenario:
- New purchase closes May 4th
- Sale closes May 17th
- Borrower needs to borrow $100,000 for downpayment
- Bridge required is 13 days @ per diem interest of Prime + 2% (or, ~$13.70 daily)
Total Cost = $350 set-up + $178 in total interest
Even after considering that a solicitor or notary will likely add bridge administration costs to the legal fees, it is often well worth the cost to facilitate an easier move. A good mortgage broker can easily lay out the costs and steps involved for each individual lender.
Additional Moving Costs
On both sides of the move there are obvious costs involved (most are laid out above); There are also some unforeseen expenses. Borrowers can access our closing cost worksheet to make sure they've covered all the bases. When the big day arrives, they'll also benefit from our moving day checklist.