Owning property, especially a home, is a big life goal for most Canadians. And typically with real estate, the strategy is to hold on to the property and allow it to appreciate in value. For a mortgage-financed home, maintaining ownership allows your equity in the property to grow.
While there are good reasons to hold on to your home for as long as you can, sometimes circumstances force you to sell, even before you have paid off the mortgage. The question is, can you?
Can You Sell a House Before Paying Off The Mortgage?
In Canada, there’s no law that sets a minimum period you must own a house before selling it. That said, though it isn’t impossible to sell a house before you have paid off the mortgage, the decision is not entirely up to you.
Some lenders set mortgage contract terms that make it hard (or very costly) to sell your home before a specific time has elapsed. Even when your mortgage contract does not give an explicit period before which you cannot sell your house, you will likely have to pay repayment fee.
Lenders do not want to miss out on the loan’s interest payments and want you to service the loan for its full term. That’s literally their whole business model. So what happens when you sell a house with an unpaid mortgage?
How To Sell a House That Has An Existing Mortgage
The challenge with selling a home that has an existing mortgage is what to do with the amount you still owe the bank. That loan balance is technically the lender’s equity in the property.
So whether you are simply moving to a new neighborhood or want to cash out the equity you’ve built in your home, the fact is the bank will want what’s due to it. There are three ways you can settle with the bank:
- Pay off your mortgage
Easier said than done if the loan balance is substantial, this is the most straightforward way to sell a house with a mortgage. It only makes sense if you have paid off a large chunk of the loan. Add the repayment fees and all the selling expenses to the payoff amount and this option quickly becomes unsustainable.
- Port your mortgage
Porting your mortgage means moving your existing loan to another property while keeping the original terms. What will change, depending on the purchase value of the new home, is the amount of the loan. You will however still need to qualify for the new mortgage. The new house itself will also need to go through the usual appraisal and approval processes.
Moving your existing mortgage to a new home makes sense for people who are moving to a new city or those who want to upgrade to a house with better features/amenities but still want to enjoy their current mortgage’s rate. It is also a good way to avoid loan repayment penalties.
- Allow the new owner to take over the mortgage
Assuming the home’s new owner agrees and qualifies for the mortgage, allowing them to take over the loan could be your best option. On paper, it is the easiest way to liquidate your equity in a property with an unpaid mortgage.
Letting the new owner take over the loan can actually be a win-win for you and the new owner. It allows you to avoid paying repayment fees, and the new owner to take advantage of favorable interest rates, in which case the low rates can be a good selling point for the home.
While it’s possible to sell a home that has a mortgage loan balance, there is usually very little financial gain if any. For it to be viable, your equity should ideally be greater than the loan balance.
If your equity is not enough to pay off your loan balance, a repayment fee, which will add to all the selling expenses you will incur, is inevitable. So before going this route, make sure to consult with your real estate agent who will help you explore all your available options.
