What is the “Five-Year” Rule for Homebuyers?
- December 15, 2021
- By Cody Battershill
Guide to the "Five-Year" Rule for Homebuyers
Are you thinking about buying a home or condo in Calgary sometime soon? If so, you may have heard about the concept of the 'five-year rule.' While not everyone fully understands it, it's an important concept to grasp if you're looking to make the most out of your next home purchase – something that we all want.
If you're unfamiliar with the five-year rule and what it implies to the process of buying and selling property, you'll want to read on. Here's everything you need to know about the "five-year" rule as a homebuyer.
What is the "Five-Year" Rule in Real Estate?
The five-year rule is a simple guideline that implies you should expect to stay in your house for at least five years after purchasing it. The concept is based on the understanding that your home sale will most likely end up costing you money if you don't.
In general, the five-year rule is something all home buyers and sellers should be aware of because it helps them do the following:
- Avoid losing money associated with a quick buy and sell transaction i.e. moving fees, utility reconnections, repairs and other associated expenses
- Acquire more assets through the potential for price appreciation over time
How Much are Closing Costs/Fees?
The five-year rule in real estate makes homeowners aware of the potential to lose money from things such as closing costs, which can be significant when buying and selling real estate in Calgary. For example, some closing costs you can expect in any real estate transaction include (in CAD):
- Adjustment fees - $300-$600
- Property appraisal - $300-$600
- Legal fees - $500-$1,500+
- Estoppel certificate - $100+
- Home inspections - $350-$750
- Disbursements - $100+ per service
- Utility connections - $30-$100 per service
In total, closing costs can range anywhere from $8,000 to $18,000 depending on the nature of your real estate transaction and the price of your home. A general rule of thumb is to expect closing costs to amount to anywhere from three to six per cent of the property's value.
Therefore, if followed, the five-year rule for buying a house helps you save on forking out mountains of cash for closing costs on multiple occasions within a short time frame. Also see:
Your Interest Payments & Equity
Another consideration under the five-year rule in real estate is that selling your home soon after buying it means you haven't built much equity. You'll spend a significant chunk of cash on mortgage payments over the first few years, money which essentially is slowing down your equity building. However, after five years or so, the interest rate on your mortgage should have dropped along with your principal amount owing.
Make sure to chat with your mortgage broker or lending institution about your options and how buying/selling a house within a five-year time frame could affect your finances. Also see:
- Importance of Mortgage Pre-Approval for Homebuyers
- What Documents Do I Need for Mortgage Pre-Approval?
How to Outsmart The Five-Year Rule
While the five-year rule intends to protect homeowners, it's not always possible to wait that long before selling. Homeowners often find themselves in a situation where they need to sell quickly. Luckily, there are ways you can mitigate the costs incurred during these situations.
> Save on your interest payments if you put more money towards your principal amount owing that is above your monthly installments. Do this frequently enough, and you'll see your interest rate drop along with your principal.
> In a buyer's market, there's a chance you got an excellent deal on your home. A year later, the local real estate market in Calgary, for example, might be significantly changed for your segment. If you're lucky, you may have seen a considerable price appreciation already above the 3 to 6 per cent you would spend on closing costs.
> Build "sweat equity" by purchasing a "fixer-upper" house and perform the renovations yourself. You'll save costs on contractors and boost up your property's value significantly once the job is complete. Ensure to consult a tradesperson and/or real estate agent to know what the best upgrades would be in terms of value for your situation.
> Rent out your home and move elsewhere for the time being. Then, when the timing is right, you can reassess the situation and decide to sell – or not. Once again, always consult a Realtor® for the best advice on market trends.
Have to Sell? Consult a REALTOR®!
The most significant disadvantage of ignoring the five-year rule for home buyers/sellers is that it may hit your bottom line. Waiting for at least five years before selling your property is typically the best practice to avert unnecessary fees and losses.
However, you might be forced to sell your home within five years of purchasing it. If that's the case, it's in your best interest to consult a professional Realtor® to help you navigate the situation.
As a professional real estate agent, your Realtor® will be able to provide you with various ideas and suggestions on how to prevent losing more capital than necessary. For example, they may recommend performing some quick upgrades or renovations for a few thousand dollars, which could bump your asking price by several thousand dollars.
Every real estate transaction is different. Ask your Realtor® how they can help make your sale a success; they should go above and beyond to accommodate your requests. If they aren't, then you should think about getting a second opinion from another agent or brokerage all together.
Homebuyers & Due Diligence
After all is said and done, buying and selling a home takes a lot of money. This is why homebuyers need to consider where they see themselves in the next 5 to 10 years of life before signing on the dotted line for a loan.
Potential homebuyers who can't see themselves in the same house after five years may want to re-evaluate their goals. If this is you, it's best to consult with a professional Realtor® to help guide you along the way towards accomplishing your real estate goals.