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Does selling your home in this overheated Canadian market make sense?
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goldengirlfinance.ca
It happens every time the real estate market starts to heat up. Hundreds of thousands of Canadians roll the dice and list their property in an attempt to turn a profit. Sometimes it makes good financial sense; more often than not, it ends up costing a small fortune.
The lesson? Before you think about flipping your home and moving up the property ladder, make sure you take the time to assess the pros and cons associated with selling. You might just find that moving could ruin — rather than improve - your savings.
The hidden costs of moving
Ask a mortgage broker their opinion on moving and many will tell you the same thing: it depletes your wealth. In fact, some contend that there's really no bigger wealth destroyer than constantly moving from one home to another.
Let's look at a hypothetical housing purchase.
Say you currently own a $400,000 home in a hot real estate market. You've talked to a listing agent who indicates they can easily get $500,000 for the home. A $100,000 profit sounds like a great deal, no? But here's the catch — you won't actually make $100,000 from the sale.
Understanding the numbers
Here are some of the fees you will need to consider when selling your home, and how quickly they can make a dent in the profit...
Your realtor isn't going to work for free. Don't forget to subtract a sizeable commission from your earnings, approximately 5% or $25,000 from the above example. Add up to 13% tax to the commission, depending on your province.
Land transfer tax (times two). If you're looking at a hot real estate market, chances are you're located in Canada's largest city: Toronto. Which means you'll also enjoy not one, but two land transfer taxes. As an example, let's pretend you're planning to move into a $600,000 home after selling your current property. Thanks to Toronto's municipal land transfer fee, you're looking at roughly $16,200 on top of the purchase price.
Next come the legal fees and the cost to hire movers. Add another $5,000 dollars (or more).
You may need to get out of your existing mortgage and apply for a new one — which could cost you in penalties and interest rate fluctuations. Furthermore, unless the stars are perfectly aligned on your purchase date, it's unlikely that your mortgage anniversary date will correspond with your new possession date. This means you could be looking at a bridge loan in order to cover that awkward period between closing dates (yes...more fees).
Throw in time off work for moving and miscellaneous decorating costs, and it isn't long before that $100,000 profit turns into a big pool of nothing, or worse, gaping debt.
So what's the deal? If serial moving costs big bucks, why do we keep packing up our belongings?
Bored and restless
According to a survey conducted by the Toronto-Dominion Bank in 2010, 16% of repeat homebuyers feel the need to move because they're "bored" with their current home. The bank did the exact same survey in 2011 and found that a staggering 42% of Canadians are moving sooner than expected.
In fact, research indicates that Canadians don't stay in one home for long — according to the Canadian Association of Accredited Mortgage Professionals, the average Canadian is likely to own 4.5 to 5.5 homes over the course of their lifetime.
But just because your home is now worth more than when you bought it, doesn't mean you'll be rolling in dough once the sold sign is up.
Moving vs. renovating
If moving doesn't make financial sense, perhaps it's time to consider renovating. Instead of taking out a new mortgage in order to afford a more luxurious home, consider using a smaller chunk of cash to improve your kitchen. Not only will you enjoy the updated amenities, but your home will also benefit from a boost in equity. According to Phil Soper, chief executive of Royal LePage Real Estate Services, the renovation market is significantly smaller than the real estate market (about a quarter of the size of the $40 billion real estate business). And yet, the profit margins can be just as convincing.
At the end of the day, it's important that you sit down and actually calculate the costs of moving versus improving your current home. Just because the market is telling you to sell, doesn't mean you need to listen.
GoldenGirlFinance.ca is a free personal finance and education site for women.
Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.
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