Here’s the situation… you’re buying a new home and you’re so excited! But you know that this is a transition home that you will sell within five years. This home will last you for a couple of years before you’re ready to buy your forever home that’s bigger for your family, or maybe even in a different neighbourhood or city. This is okay! But, you’re going to want to reconsider a fixed mortgage.
Within this blog post, we’ll go through why it may be best to rethink your fixed mortgage if you’re already planning another move down the road. And, what I suggest instead.
The penalties with a fixed mortgage.
If you are planning to sell your home within five years, you may want to reconsider a fixed-term mortgage. The penalties associated with selling your home before your fixed term is up are fairly substantial. The penalty for breaking your mortgage term, whether it be selling or refinancing, with a five-year term, is known as IRD or Interest Rate Differential. This IRD is calculated differently with each lender and is not a friendly calculation.
To give you an example, one lender could charge a $5,000 IRD penalty on a $300,000 mortgage and another lender could charge a $10,000 penalty. That’s how large the difference can be between lenders.
This calculation is typically complicated and unfortunately, you will not know what it is until you are ready to sell your home and the lender prints off the amount that is in their system (which is an automatic calculation). The calculation of this penalty has so many variables, depending on:
- what the current rates are at the time you sell
- how far you are into your mortgage
- what your rate was when you originally got the loan
Deciding whether it’s worth it.
It will all depend on how long you have left on your fixed mortgage rate to determine whether or not it’s worth it to break the contract. You can speak with a mortgage broker to go over your situation and plan to find out the penalties that will be associated with changing it.
Then, when you know the costs, you can decide whether it’s worth it. A lot of times the penalties will change the further you get into the mortgage and should go down, however, this is not always the case. And it’s not something I can promise you will happen.
The solution is variable.
So, what’s the solution if you’re planning to sell within five years? A variable mortgage is definitely worth consideration.
If you decide to sell within the five years when you have a variable rate mortgage, you will only pay a three-month interest penalty. This is the same at any point you decide to break your mortgage. Whether it’s been 4 years or 1 year.
For example, with a $300,000 mortgage, 2.4% rate, 5-year term, and a 25-year amortization, you will be paying between $500-580 per month in interest. This would mean that your penalty would be $500 x 3 months for a total of $1,500 or $580 x 3 months for a total of $1,740. This is a far less penalty than if you had taken a fixed-rate mortgage.
Consider working with a mortgage broker.
There are many things to consider when purchasing a home. This is especially the case if the home you’re purchasing will not be your forever home and you’re already planning to sell it before you even buy it!
When you work with a mortgage broker, like me, I’m able to go over your situation and advise on what type of mortgage would be the best for you. As you can tell from this blog post, a variable mortgage would be the definite right answer if you’re selling your home in five years.
Then, once that’s decided, I’d get to work finding you the best rate.
If you’re interested in working with me or you have any questions about fixed vs. variable, reach out to me today! I’d be happy to go over your situation and let you know what I’d suggest in terms of mortgages.