Are you planning a move soon? Has the recession unfortunately made downsizing the right choice? Many Canadians are planning to sell their home in 2023 and move into a new one, and while Perch is here to help you get your mortgage on your new place, you might be wondering  what happens to your old mortgage? Nowadays mortgage amortization terms of 25 to 30 years are the norm, which means if you haven’t lived in your current home for decades, you likely still have some mortgage left to pay.

Let’s take a look at what happens to your mortgage when you sell your home.

What happens when you sell your home and you still have a mortgage?

When you sell your home with an outstanding mortgage, the proceeds from the sale will be used to pay off your mortgage, as well as closing costs and other fees, and you will no longer be responsible for making monthly mortgage payments. If there’s any money left over from the sale, you are free to keep it, we’ll go over that situation in more detail below.

If you are unable to sell your home for a price that covers the remaining balance of your mortgage this is referred to as a short sale, and you’ll need to work with your lender to find a solution. 

Do I need to pay fees for breaking my mortgage early?

Whether or not you need to pay mortgage penalty fees for selling your home is dependent on what kind of mortgage you have. An open mortgage allows you to pay off your mortgage early with no penalties, while a closed mortgage will require you to pay penalty fees when ending your mortgage early. You can review your mortgage contract or ask your mortgage advisor to confirm what kind of mortgage you have. 

Open mortgages typically have higher interest rates, so the majority of mortgages are closed and it’s likely yours is too. When you sell your house before your mortgage is fully paid off, you will likely need to pay mortgage penalty fees.

What happens if you sell your home and the value has gone up?

If you’re in the fortunate position where your home is worth more than what you’ve paid for it, congrats! In this case, you have some profit to look forward to as the value of your home has appreciated over time. This means when you sell your home and need to pay off the remainder of your mortgage, the value of the sold property should more than cover the remaining principal. When you sell your home, you will use the money from the sale to pay off the balance of your mortgage as well as any mortgage penalty fees. 

When you sell your home for more than you bought it with a mortgage still owing, your mortgage will be discharged and you will pay off the rest of the mortgage plus fees, and can then pocket the remaining balance.

If you’re wondering if you owe any taxes on the profit made from selling your house then check out this article here. In short, if it’s your primary residence you won’t have to pay taxes, but if it was a rental you will need to pay capital gains tax on the profit.

What happens if you sell your home and the value has gone down since you bought it?

If you are selling your home at a loss, it doesn’t mean the end of the world. While it’s not ideal, there are two potential situations you could find yourself in when selling your home for less than the value you bought it for when you got your mortgage. 

In one situation, the money you get from selling your home still covers the balance remaining on your mortgage. With prices down around 15% in major cities, and down payments usually being 20%, this should be the case for most Canadians selling their home in 2023. We’ll go over this scenario in more detail below.

The other situation you could unfortunately find yourself in is the result of your home value going down enough that the balance remaining on your mortgage is more than the selling price of your home. This is referred to as a short sale and means you will have to work with your mortgage lender to sell your home. This can add extra steps, like needing the approval of the lender for the sale. In this case, when you pay off the remainder of your mortgage you may have to come up with the extra cash needed to cover the balance of the mortgage left over after using the money from selling your home. This is in addition to the mortgage penalty fees you may have to pay for prematurely ending your mortgage. 

Let’s say you purchased a home for $500,000 with a $100,000 down payment meaning you still have $400,000 to pay in principal. A few years later you sell your home, and you are only able to get $450,000 for it. For simplicity, let’s just imagine you didn’t pay any principal on the home in that time, and your mortgage payments only covered the interest. You would receive the $450,000 from the buyer, and use this money to pay down the remaining $400,000 principal as well as mortgage penalty fees.

You can see that even though the value of your property went down, the money from selling the home was enough to cover the remaining mortgage, because of the home equity you had from your down payment. When you look at this from a net worth perspective, you lost money, but this just illustrates that the value of your home going down doesn’t necessarily mean you’ll need to scramble to get cash to pay off the mortgage when you sell.

To conclude

Overall, when you sell your home, the proceeds from the sale will be used to pay off your mortgage, and you will no longer be responsible for making monthly mortgage payments. If you have a closed mortgage like most homeowners, you will also need to pay mortgage penalty fees for ending your mortgage early.

If you have more equity in your home than the balance of your mortgage, you will have money left over to pocket. If you are unable to sell your home for a price that covers the remaining balance of your mortgage you will need to work with your lender to find a solution.

If you’re selling your home to move, then you may be interested in checking out our Home Buying Guide.