Understanding the Five Year Rule for Buying a Home

Posted by Justin Havre. on Thursday, August 29th, 2019 at 7:26am.

The 5 year rule Canadian real estateIf you've been looking into real estate in Calgary you've probably run into the five-year rule and may not fully understand it. If so, here's a brief explanation that will help you get a grip on this rule and where and why it applies.

What is the Five-Year Rule?

This is a very general rule that means you should plan on remaining in the home you purchase for five years at least. If you don't, it will hit you in the pocketbook, in most cases. This is due to the closing costs that need to be paid when you sell your house and can be a substantial amount, depending on the value of the home.

As well, you'll have to look at how much equity you have actually built up in your property. When you first take out a mortgage you'll be paying mostly interest for the first few years. This is when the mortgage and the interest rate are at their highest. It works out for most home purchases that there won't be enough equity in place to substantiate a new purchase until you've hit the five-year mark of ownership.

Outsmarting The Five Year Rule

If you're looking for a home that you can live in for only a few years and then upgrade, you can do it without taking a hard financial hit if you play it smart. Instead of looking for the biggest house that you can possibly afford in terms of mortgage payments every month, check out the smaller houses so that you end up with a lower monthly payment. With the extra money, make extra payments towards your mortgage every month and you may be able to sell your home in a few short years without taking a loss.

The thing that you'll want to take into account here is whether you are willing to compromise and live in a smaller house for 3 years so that you can upgrade earlier. Another thing to consider is whether it's really wise to buy the biggest home you can for your first house purchase anyway. Most first-time homebuyers get quite a surprise once they move into their house and actually see the reality of the bills that they need to confront. It's always nice to have some sort of comfort zone in place so that all of your money isn't going into the mortgage. It's a good idea to plan on having some money left at the end of the month to cover extra costs or to put into paying off the mortgage faster.

Risks of Ignoring the Five Year Rule

The biggest drawback to ignoring the five year rule of real estate buying and selling is certainly going to be financial in most cases. Typically, the first few years of mortgage payments are consumed by interest and paying off sale-related fees such as agent and broker commissions, the remaining balance can be rather hefty depending on the home's current value.

This means that less—if any—profit will be realized from the sale of a home within five years of its purchase if not enough equity has built up. One must further consider that when selling they will be tasked with closing costs and commissions once again in most situations. Overall this can be costly according to industry experts. Waiting until the five year mark of homeownership is often the best move one can make in today's real estate market.

You'll have to crunch some numbers to make sure that your plan can take you towards an upgrade in three years instead of five and you'll have to be willing to sacrifice for a smaller home in the meantime to make it happen. For many, it's worth the small price to pay in order to be in a position where they can afford a new home purchase within a few year's time.

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