When a person sells their property, they have to ensure that all debts in relation to that property, such as mortgages, are paid off. Of course, they can use the sale proceeds to pay for those.
But what most people do not know is that paying off mortgages before their term ends can result in significant interest penalties and fees.
However, that is a problem that can be resolved by early planning. Today, Sabrina – an experienced real estate lawyer at Varity Law, will share some insights on how to avoid mortgage penalties when selling your property.
Avoid Mortage Penalty by Paying off Mortgages
When buying a property, many people will get a mortgage – usually a closed mortgage with 3-5 years as a term. After the term ends, you can renew the mortgage or use another lender to replace the current mortgage.
An often neglected problem is that if you pay off the mortgage before its term ends, you will be subject to mortgage penalties. The same applies if you sell your property before the mortgage term ends.
Another issue is that the interest penalty is not always three months of interest. Banks often have a complex system for calculating penalties. In general, the idea is that the earlier you pay off the mortgage, the more penalties you will incur.
Let’s use an example. Let’s say Casey has a 5-year closed mortgage. If she sells her property after one year of getting the mortgage, then her interest penalties would be very high, and they could even be tens of thousands of dollars. But if she sells her property after 4 years and 10 months of getting her mortgage, then the penalty could just be 3 months’ interest.
If you decide to buy one property and sell another within a short time, you may transfer your mortgage and avoid all interest penalties. This means that you are transferring the existing mortgage from the property sold to the purchased property. If you do this, sometimes banks will waive the prepayment penalties.
Lastly, many mortgages are set up to also include a line of credit. When your real estate lawyer notifies the bank that you are selling your property, banks will usually immediately close your line of credit. Thus, you must take out any money you may still need from the line of credit before asking your lawyer to proceed with the mortgage discharge request.
Pay Off Other Debts
Other than mortgages, there could be other debts related to the property. Common ones include:
- Any rental items, such as hot water tank –if the seller want the buyer to inherit the rental item, the items MUST be listed on the agreement of purchase and sale, under rental items; otherwise, the buyer is not obligated to inherit the rental items, and the seller must buy off the entire item.
- Bridge Loan – some people prefer to buy before they sell a property – this would allow them to move furniture from the property being sold to the property being purchased. However, bridge loans often have higher interest rates than normal mortgage, so it’s a great idea not to hold the bridge loan for too long before paying it off – essentially, this means the closing date for the purchase and the closing date for the sale should not be too far apart.
Losses from Delayed Closing
Sometimes, properties would not close on time due to the buyer – for instance, their mortgage approval requires more time.
If this happens, the seller can ask for compensation. However, Courts are more willing to accept compensation for damages rather than penalties. This means that the sellers have the best chance when they can prove their actual damages rather than potential damages.
I’ll illustrate this with an example. Let’s say Casey’s closing date is June 1st, 2022. However, due to the buyer’s inability to close, the closing date is now pushed to June 6th, 2022. Casey’s actual damages will likely include:
- Property taxes – since delayed closing is due to the buyer, Casey’s obligation to pay property taxes should still be to May 31st, 2022 and not to June 5th, 2022;
- Common expenses – same idea as property taxes – Casey should only need to pay until May 31st, 2022;
- Mortgage discharge interests – Casey have a mortgage with Scotiabank, and every day the bank charges her interest if she does not pay back the mortgage – if the closing was not delayed, she would pay off the mortgage by June 1st. But now, she is incurring an extra 6 days of interests – this should be paid by the buyer.
- Other actual losses – if Casey is buying and selling on the same day, then because her sale did not close, her purchase also would not close (she need the money from the sale as down payment for the purchase). Any damages she suffered due to the purchase not closing are also her actual damages.
Conclusion
The most important thing to sellers is getting the sale proceeds into their hands after the transaction closes successfully. With good planning, sellers can avoid many interest penalties and fees on their mortgage discharge. Sellers should also be prepared to record their actual damages if there is a delayed closing caused by the buyers.
Variety Law has closed countless real estate cases and resolved many complex problems. If you have any questions regarding your real estate purchase, please book a 1st free consultation with us: https://calendly.com/sabrina-668/1stfreeconsult
This article is meant to offer general legal information, not specific legal advice that applies to your situation. For specific legal advice, please speak to a licensed lawyer.
