Porting and Assuming Your Mortgage
What happens if you buy a home, take on a 5-year term, and then after 3 years you have to sell your home? It happens more often than you’d think, and you’re only left with three options: you can break your mortgage, port your mortgage or have your mortgage assumed. Here’s a quick rundown of each option, when each makes sense and what the potential downsides are.
|Description||Cancel your original mortgage agreement||Take your current mortgage, with its rates and terms, and move it to another property||Transfer your current mortgage agreement to the buyer of your home|
|When it makes sense||You’re not buying another property OR
Current mortgage rates are much lower than your existing rate
|You’re buying a new home at the same time you’re selling your existing home||You’re not buying a new home and rates today are higher than you your existing rate|
|Downside||You could always potentially have to pay a large payment penalty||If you have a variable rate mortgage, you likely won't be able to port it||1) You need the buyer to agree to this
2) They need to pay you the difference between the purchase price and the mortgage
3) You are responsible if the buyer defaults in the first 12 months
Your first option is to break your mortgage and pay the prepayment penalty that goes along with it – but the fee can add up fast. Your other two options are to either port or assume your mortgage.
Porting Your Mortgage
Simply put, porting a mortgage means taking your mortgage, with its current mortgage rate and terms, from one property and transferring it to another property. You can only port a mortgage if you are buying a new property at the same time you are selling your old one. And if you need a larger mortgage for your new property, don’t worry - you can talk to your lender at the same time about blending and extending your existing mortgage.
On top of being able to avoid the prepayment penalty, the biggest reason you would want to port your mortgage is if your current mortgage rate is lower than anything available today. That being said, if your rate is higher than today’s lowest rate, you may want to see if paying the penalty would outweigh the new lower interest rate you could qualify for.
Unfortunately, not all mortgages are portable. For example, most variable rate mortgages are not portable. As well, lenders only offer between 30-120 days to complete the port, which may not be enough time for you if your closing date on either home is outside of that time period. With this in mind, it’s a good idea to sit down with your mortgage broker and discuss your options, before you even start the house hunting process.
Assuming a Mortgage
By having your mortgage assumed, you (the seller) are simply transferring your current mortgage to your buyer. Assuming a mortgage makes sense if you are selling your home without buying another. As well, if your current mortgage rate is low, and rates are on the rise, giving your buyer the opportunity to assume your mortgage might make your property that much more attractive.
One thing the buyer has to consider, however, is the potential need to pay for the difference between the mortgage and the purchase price. For example: If your outstanding mortgage balance is $200,000 but you want to sell the home for $350,000, the buyer would assume the mortgage but then pay you the difference ($350,000 - $200,000 = $150,000).
The most important things for you to be sure of when someone wants to assume your mortgage are: 1) that the buyer can be approved for the financing, and 2) that all of your responsibility is stripped from your original mortgage loan agreement. Even after the buyer has assumed your mortgage, the lender can still hold you responsible for the mortgage if the buyer were to default on the loan. Only after 12 months of consecutive payments made by the buyer will you, the seller, be off the hook.