Thinking of switching homes but still have a pending mortgage? You can port the mortgage.
It entails transferring the mortgage from one property to another. But you must be happy to stay with your current lender. If you’d like to switch providers, then porting a mortgage might not be ideal for you. Let’s talk about this option depth, and all you need to know to decide if porting is a good move.
What is porting a mortgage (Definition)
First, you need an existing mortgage contract with a lender. It should specify the interest rates, loan term, amortization schedule, etc. Now, mortgage porting just means that you’ll transfer this contract with its existing terms to a new property.
Things stay the same. Only that you’ll be moving from one property to another, which also means selling the old home and buying a new property simultaneously. After selling the current home, the pending mortgage balance has to be paid off.
You mostly need to have a fixed interest mortgage rate
In most cases, only fixed-rate holders qualify to port their mortgages. If your rates fluctuate based on the prevailing market rates, you must first switch from an ARM to a fixed rate. One way to do this is by refinancing your mortgage. Most authorities recommend shopping around for a refinancing partner, which should be quite easy to execute using the top loan aggregators in Canada.
When porting mortgage make sense
Most homeowners consider porting when changing houses. For instance, you might want to move to a cheaper house, downsizing. As families grow, they often want to move to larger properties, porting to more expensive houses. You might even find yourself dealing with a sudden relocation to a different town or city.
Now, the biggest motivation for porting is when current market rates for mortgages are up, and you still want to keep your prior lower rate. That will see you making lower payments, and hence, you’ll save thousands of dollars. Another scenario is when you have a longer remaining term on your mortgage, and breaking this agreement is expensive.
Five factors to consider when porting a mortgage
1) You have to qualify again
Getting approved for porting is not straightforward. The lender still has to reevaluate your credit and financial standing. When they add more money to you so you can purchase a more expensive house, the background check will be strict. Some of the factors they consider include your current debt to income level, income amount, job status, etc.
2) Porting a mortgage to a cheaper house Canada
Porting to a house with the same price is not likely. There will be a difference, for instance when you purchase a cheaper repossessed house. If the new property is 0 to 25% cheaper than the existing mortgage, the lender will require a larger down-payment. You may have the cash after the sale of the existing house and payment of the pending mortgage. Asking for a larger down payment allows the lender to reduce their risk.
When buying a more expensive home, the lender has to add more money to your current mortgage. The old interest rate was for a said amount. The lender may charge a higher rate for the loan money they add. Both rates are blended together resulting in a new rate.
3) Time restriction
You have to keep in mind that you’ll have a deadline to sell your old home, find a new home, and close on it. The time allocated ranges from 30 to 120 days. Some banks will give you up to 6 months, but it’s not common.
4) Time remaining on your mortgage
The motivation for porting largely remains to avoid the prepayment penalties for ending a mortgage contract before the loan term expires or prior to the expiration of a fixed-rate period. The prepayment penalty ranges from 1% to 5% of the total outstanding balance. If you have a few months remaining on your mortgage, then the prepayment fees will be lower. Mostly, buyers end up paying 3 months’ worth of interest as a penalty. By porting, you potentially save on these penalties.
5) Additional costs
Porting doesn’t mean that you’ll avoid fees altogether. As a homeowner, you’ll contend with fees like appraisal (for your new home), porting fees, etc. If the additional costs are lower than pre-payment penalties, then porting is a good option than breaking the mortgage.
6) Affordability rules
The requirements for qualifying for a mortgage might have changed from the last time you obtained your mortgage. For instance, the rule now is that the total housing cost should not go over 32% of the gross income of a particular household. It, therefore, becomes harder to port if your income has decreased. If you’re now self-employed, it may be a challenge as the lender will want to verify your income again.
Seeking help when porting
Porting a mortgage is certainly becoming more popular, but it is still an involved process. You must be very familiar with the terms of the current contract. That’s why we recommend seeking help from more experienced mortgage brokers or talking to loan representatives.
Ensure that porting is part of the agreement
Porting is not automatically included in all mortgage agreements. You should ask if your current agreement includes this option. If not, on future mortgages ensure that you ask for it, because loan terms are not easily amenable.
Alternative to porting
Instead of breaking the mortgage on an existing property, you can offer to have the new buyer assume the current mortgage. It might even make a property more attractive since the buyer doesn’t have to apply for a mortgage afresh.
You can also think of refinancing with the same lender if you still want to remain at your current home and save money.
Finally, weigh all the options you have on the table, and crunch the numbers (or have them crunched by an expert) to know the pros and cons of the route you want to take.