Sounds complicated but it's not.Your family is growing and it is time to move out of your starter home and into something with room to breath. What is the first thing you do? Call your parents of course. Always a great place to start.
After the obligatory apologies for not calling more and assurances that you are eating enough vegetables you get on to the business at hand. This is your first house, you have never sold one before and you are looking for some advice. Your parents are from the old school and say that they will call Joe the realtor because he has sold 3 houses for them. Joe is such a good guy he will only charge you 5%.
Wrong, he is going to charge 5% of the transaction but he is charging YOU 20% of your equity!
Here is the breakdown.
You paid $190,000 for your townhouse 3 years ago and put down the minimum deposit of 5% leaving you a mortgage of $180,500 (not including any CMHC fees). Based on an interest rate of 5% (you didn't have the advantage of today's low rates) you would have $168,672.50 left on that mortgage. For ease of calculation we will call it $168,000.
Your house has increased in value since you purchased it and is now worth approximately $225,000, congratulations. If you were to sell this home with Joe he would charge you 5% or $11,250 (I won't even get into the fact that you would have to pay GST on this).
$225,000 (Value) - $168,000 (Mortgage) = $57,000 (Equity)
The bank owns such a large piece of your home (75%) you really only have $57,000 in equity built up between your appreciation and the amount of principle you paid off on the loan. If you take the $11,250 as a percentage of what you actually own of the house, Joe is taking a total of 19.7% of your equity. Everything that you have worked for over the last 3 years and he is coming in and taking 1/5th, that's fair, right?
$11,250 (5% Commission) / $57,000 (Equity) = 19.7%
For those that need a refresher on how to calculate using "New Math"...
M
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