At Avi Urban, we work with the experts to help you make the best decisions when buying your new townhome or apartment with us. One of these experts is Laura Parsons, Bank of Montreal Manger of Mortgage Specialists and Calgary Sun Columnist.
With two new south Calgary townhome and condo developments now selling, we’re hearing a lot of current homeowners ask how they can manage to buy a new home if they already own their current place.
Buying a new home can be overwhelming, especially when you already own a home, so Laura is here to walk you through your choices:
1. Instead of selling, rent it out: If you are purchasing another home conventionally (20% down payment) most don’t know that BMO can utilize up to 80% of expected rent to reduce the debt servicing if you want to keep your current home if you don’t want to sell now and move twice.
You may also want to rent it out to wait for a better sellers market and take advantage of the low vacancy rates. Some people are also upside down meaning they have little or no equity if they sell right now because of penalties so renting it out until things look better or your term runs out is a good solution.
2. Deal with mortgage penalties: If you break your mortgage agreement before its time to renew, you will have to incur penalties. Penalties can be dealt with in several ways.
- The first is to prepay your mortgage the 20% allowable prior to payout. Doing this you, can utilize a line of credit or demand loan. Then once your house is sold, pay off the loan/line with your proceeds. By doing this you will reduce your penalty.
- Porting you mortgage to a new property is also another way to avoid a penalty. By porting, that would mean your old rate and the current rates (for the remaining or longer term) would be blended. Because the new and old rates would be blended, you wouldn’t get the best rate on your new home, but you would avoid penalties.
- Know what penalties apply to your mortgage. There are two types of penalties. The first is the three months interest penalty, which means you’d pay three months worth of interest. The second is the IRD interest rate differential, which means whatever the difference between your rate and the going rate is, i.e. currently you have 5%, but rates are now 4%, the financial institution would then charge you 1% (the loss) on your outstanding balance for the remainder of the term.
3. Try an assumable mortgage with cash back: If your penalties are very high and you sell your home, you can negotiate with the purchaser to assume your mortgage or to port and blend it in theirs. There are options like cash back in lieu of interest rate. In this case, if you sell your home and you’re short on the payout, you can take a cash back on your new mortgage instead of rate to pay for the penalty. Keep in mind, cash back only comes to you once the mortgage is advanced.
There are many ways to go about selling your current home and buying a new condo or townhome. The best place to start is with a mortgage specialist or broker who can help you through the process. Have a question for Laura Parsons? Leave a comment below or email firstname.lastname@example.org.