Mortgage are complex products, with terms and conditions that are generally inflexible by design. As a result, making changes to your mortgage, or selling your home before your mortgage term is over, can be a very difficult and expensive process, often requiring you to refinance or break your mortgage.
Portable and assumable mortgages are two alternatives that might exist for you. They are very different tools that suit different use cases, but understanding the differences is a good way to learn if they might be able to help you.
What is a portable mortgage?
Portable mortgages allow you to transfer a mortgage from one property to another. This lets you hold on to any favorable terms or a great rate with your existing lender, usually with no penalty or cost associated with the transfer. Porting a mortgage is only allowed when you sell your existing home and purchase a new one at the same time.
Of course, the mortgage will be registered under a different title with the new property, so for all intents and purposes, it isn’t identical. A big advantage of this type of mortgage is that you do not have to pay additional mortgage closing costs on the new property, which can result in a significant saving.
The main use case for a portable mortgage is when you want to move home midway through your mortgage term, but want to keep your mortgage intact. If the new home is more expensive, you’ll need to borrow more from your lender, generally resulting in a blended mortgage. Your new mortgage rate will be a combination of your existing rate and current rates.
Pros and cons of portable mortgages
Here are some of the benefits and disadvantages of portable mortgages in Canada:
|No penalties incurred when moving the mortgage to a new home||Can only be ported once|
|Can save you money on mortgage closing costs if you plan to move home during your term||When porting to a more expensive home, you will generally need to blend and extend your mortgage, which may have less favourable terms|
|Reduce the administrative hassle of getting a new mortgage when you move home||Moving home is still a big operation – staying put until the end of your mortgage term is easier|
|Ability to retain the rate and features of your existing mortgage (especially useful if rates have increased)||You may have to requalify for your current mortgage, and your new home will need to suit your lender’s lending criteria|
|Often no need to restart your mortgage term when you move home||If you do not requalify with your new home, you may be forced to break your mortgage, incurring prepayment penalties|
Is my mortgage portable?
Many mainstream mortgages are advertised as portable, but the truth can be more complicated. Many lenders do not offer portability on variable-rate mortgages, for a start. Additionally, many lenders will require you to requalify for your existing mortgage when you move, and your new home will need to suit their lending criteria.
If you don’t qualify for your newly ported mortgage, you may be required to refinance instead, which will break your mortgage and result in a prepayment penalty. For fixed-rate mortgages, these penalties can be very significant.
What is an Assumable Mortgage?
An assumable mortgage is a mortgage that is transferred from a homeowner upon the sale of their home to the new buyer. If you own a home with a mortgage, an assumable mortgage would see you see the home, with the buyer taking over your mortgage.
This can be a very attractive selling point if mortgage rates have increased since your mortgage was established, as the new buyer will benefit from your lower rate. Assuming your mortgage also allows the buyer to save on the legal costs of registering a new mortgage.
There are some disadvantages associated with assumable mortgages, and they can be more effort than they’re worth, both for borrowers and for mortgage providers. As a result, assumable mortgages are not very common in Canada.
Disadvantages of assumable mortgages
If the existing mortgage doesn’t cover the full price of the property, the buyer will have to make up the difference with cash or some other source of funding. Additionally, the new buyer will likely still be required to qualify for the existing mortgage.
There is another major drawback for assumable mortgages. If the new buyer is unable to make their payments, the original mortgage holder may retain responsibility for paying back the mortgage. This needs to be determined based on the circumstances of the original mortgage and the sale.
The bottom line: portable vs. assumable mortgages
Portable and assumable mortgages may seem like similar products, but they are suited for very different situations. Portable mortgages are more common, with many Canadians wanting or being required to move home during their mortgage term. Assumable mortgages are more complex and far less common and are best used when the seller is leaving the housing market.
Whatever your situation, both portable and assumable mortgages carry a significant risk that may outweigh the potential savings. It’s a good idea to speak to a mortgage broker for expert advice on any decision you make.