Years back, as you turned the key and walked into your current home, you probably had a wide smile on your face, thinking this would be your forever home. But life often leads you down roads you didn’t plan for. At times, even if you try your hardest to stay, certain personal, financial, or lifestyle reasons may push you to sell your home sooner than planned. In fact, it is possible that circumstances could lead you to sell your home even while you still have a mortgage balance.
However, is selling your house an option even if your mortgage is still active? Let’s go into this with more detail.
Is Selling a House with a Mortgage Balance Allowed?
In Canada, a mortgage is a legal agreement that gives your lender a claim on your property until you repay the loan. While the lender’s claim remains, this doesn’t stop you from putting your home on the market. However, you must fully repay your lender before the new owner takes possession when you sell your house. This repayment usually comes directly from the sale proceeds.
If your home sells for more than your outstanding mortgage balance and all selling costs, you will pocket the difference as profit. However, the picture changes if your loan balance is close to or higher than your home’s market value. In this case, you could walk away with a much smaller profit, or, in some cases, face a loss.
Step-by-Step Guide for Homeowners Looking to Sell with a Mortgage
The process isn’t complicated, but it works a little differently compared to selling a mortgage-free home. Here is a clear step-by-step guide to help you through it:
STEP 1: Figure Out How Much of the Home You Actually Own
The first thing you should do is understand how much of your home you truly own, “home equity.” Equity is your home’s current market value minus the remaining balance on your mortgage. Let's say your home's market value is $700,000 and you owe $450,000 on your mortgage; your equity would be $250,000.
To check your equity, review your most recent mortgage statement to see your current balance. Then, get a realistic estimate of your home’s market value with the help of your Realtor.
STEP 2: Contact Your Lender for an Official Mortgage Payoff Quote
A payoff quote is a lender-issued summary that details exactly how much money you must pay to clear your mortgage. Your payoff quote will include:
- The remaining principal balance
- Interest accrued up to the day of the quote
- Prepayment penalties and discharge fees
The mortgage payoff quote is only valid for a short period. Because interest accrues daily, the amount due might be higher by the time you close.
STEP 3: Work Out How Much You Will Walk Away With After the Sale - “Net Proceeds”
Your net proceeds are the amount you will actually receive from the sale after paying off your mortgage and covering all the selling costs. These costs can include:
- Real estate agent commissions
- Legal fees
- Mortgage discharge fees
Mortgage Prepayment Penalty: Extra Cost for Early Mortgage Repayment
If you settle your mortgage ahead of schedule, your lender might impose a prepayment fee. In Ontario, the prepayment penalty varies depending on the type of mortgage. For fixed-rate mortgages, lenders charge the greater of:
- Three months’ interest on the remaining balance, or
- The Interest Rate Differential (IRD) - the difference between your current mortgage rate and the lender’s current rate for a term equal to the remainder of your mortgage. The lender then multiples the difference by your outstanding balance and remaining time.
Canadian lenders generally calculate a three-month interest fee when you break a variable-rate mortgage.
Let’s say you have a fixed-rate mortgage with $200,000 remaining at a 5% interest rate, with two years left in your term.
- Three months’ interest: $200,000 x 0.5 ÷ 4 = $2,500
- Interest Rate Differential: Let’s suppose your lender’s current rate for a two-year mortgage is 3% and your rate difference is 2%.
$200,000 x 0.2 x 2 years = $8,000
Since the IRD ($8,000) is higher than three months’ interest, that would be the penalty you would owe.
STEP 4: Get Your Home Ready for the Market
You can work on making your home sale-ready after you have a clear picture of your financial situation. To do this, start by decluttering and making minor repairs, like fixing leaky faucets. Improving your home’s curb appeal is equally important.
After your home is ready, collaborate with your real estate agent to set a competitive asking price. Remember, the listing price also impacts your net proceeds. Hence, ensure the price aligns with your financial goals and the equity you hope to retain.
STEP 5: Complete the Sale and Pay Off Your Mortgage
When you accept an offer that meets your expectations and the buyer starts the financing process, the closing stage usually begins. The closing stage takes 30 to 60 days, depending on the conditions set in the agreement.
During closing, the buyer’s funds go to your lawyer, who uses them to pay off your mortgage in full. Then, your lender releases the mortgage from your property’s title. This step officially removes the lender’s claim on the property.
Your lender also deducts all selling costs, after which you receive your net proceeds. Then, once you pay the mortgage and the property title changes hands, your obligation to the lender ends.
Handling the Sale of a Mortgaged Home is Easier Than You Expect
Selling a house with an existing mortgage isn’t as complicated as it sounds. Unless you owe more than your home is worth, you can move forward confidently. You just need the right team to guide you through the home sale process.
A skilled real estate agent can help you price your home competitively, attract buyers, and negotiate the best deal. A real estate agent takes care of all the legal paperwork, ensuring nothing falls through the cracks. Your mortgage lender also plays a vital role; they can explain any fees or penalties and clarify exactly what’s needed to close your mortgage. With expert support, you can confidently sell your home, clear your mortgage, and step into your next chapter with ease.