Moving to a new home is an exciting experience, but it comes with tons of decisions, just like every big financial step.
One is porting a mortgage, and it is a viable option in all home purchases. Why?
- What is Porting a Mortgage?
- What are the Benefits of Porting a Mortgage?
- Potential Downsides to Porting a Mortgage
- Factors that Determine if You Can Port Your Mortgage
- Mortgage Porting Challenges
- What does it Mean to Assume a Mortgage?
- Porting a Mortgage Canada vs Breaking a Mortgage vs Assuming a Mortgage
- FAQs on Porting a Mortgage
- Bottom line: Is Porting a Mortgage the Right Step?
Do you have a competitive mortgage rate on an existing property that you’d love to keep and take to your new home? That is where the “porting a mortgage” feature comes in!
What if this is your first home purchase? If there’s the slightest chance you could move house before the end of your term, you’ll want this feature to be on the table.
In this article, we’ll discuss what porting a mortgage is, when to port your mortgage, the pros, and cons, and help you reach the right decision for you. Let’s get started!
What is Porting a Mortgage?
Porting a mortgage means transferring your present mortgage contract and rate from your current home to your new one. You can only port your mortgage if you are purchasing a new property at the same time you’re selling your current one.
People usually port their mortgages to avoid the stress of applying for a new one all over. Another reason is to avoid paying the prepayment penalties that come with breaking a mortgage. However, you’ll still have to pay a fee to port your mortgage and to have an appraiser review your new property, but these fees are much lower than the penalties attached to breaking a mortgage.
Porting a Mortgage to a Cheaper House
If you are porting a mortgage to a cheaper house, you may be able to pay down your current mortgage amount using your prepayment privileges. In other words, your lender may not charge you any penalty if your payment is within the pre-payment privilege limit.
But, if, for example, your mortgage is cut in half, you may fave a little penalty but not the full breakage penalty.
Porting a Mortgage to a More Expensive House
What if you are porting your mortgage to a more expensive house? That means your new property’s mortgage will be larger than the existing one. In this case, your lender will offer you a “blend and extend.” This is an average of your existing mortgage and interest rate, with the new mortgage amount and rate to make one overall mortgage.
When is the Best Time to Port Your Mortgage?
It makes sense to port your mortgage when your current mortgage rate is lower than the current rates offered by lenders in the market. This is because your blended rate will be lower than your rate would be if you were to start a new mortgage all over.
However, if you qualify for a lower mortgage rate than your current rate, porting would not make sense. To access these lower rates, consider refinancing your mortgage. Ensure you know the penalty to break the mortgage before deciding whether it’s a good idea or not.
What are the Benefits of Porting a Mortgage?
- You Save Money. When you port your existing mortgage, you save money on interest costs and on the prepayment charges that come with breaking a mortgage early. Depending on the time you have left on your mortgage term, these savings could be high.
Even if you need a higher mortgage amount for your new home, you can blend your new rate with your existing rate to get a better overall rate for the extra money and a lower monthly payment.
- You Maintain Your Existing Lower Interest Rate. If the interest rate on your existing mortgage is lower than current market rates, you won’t want to lose it. Then porting a mortgage would be the smart move. Keeping your lower interest rate can save you thousands of dollars in interest charges over the remaining mortgage term.
- It Saves Stress. Porting your mortgage and staying with the same lender will reduce the amount of work you need to complete during your move. There’ll be no need to go through another mortgage application process since the lender will already have all the needed information.
Potential Downsides to Porting a Mortgage
- If you are moving to a more expensive house and you need additional mortgage money, your bank could charge a high rate on the additional money. For example, if your fixed rate is 1.98%, your bank could charge you around 2.48% for the additional money.
- Staying with the same lender may make you miss out on better deals.
- You may have to pay additional costs on valuation fees, legal fees, arrangement fees, and a small exit fee.
Factors that Determine if You Can Port Your Mortgage
Certain factors determine if you can port your mortgage or not. So before you make it a part of your financial plan, consider these factors:
Your Mortgage Contract
Have this in mind ⎼ Not all mortgages can be ported. Your lender should have informed you if your mortgage is portable when you signed the loan papers. If your mortgage isn’t portable, you can’t negotiate it. Fortunately, most mortgages offer portability.
If you are not certain your mortgage is portable, contact your lender to go over your mortgage contract. While discussing with your lender, you should also verify if porting is the best option for your current interest rates. However, remember that your lender is also in the business to make money, so the eventual decision falls on you.
Your New Property’s Purchase Price
Your new home’s purchase price will also determine whether or not you can port your mortgage. If your new home’s value is different from your old home’s, you may need to change some things to achieve portability.
For instance, if your new home’s mortgage value is higher than what you currently have, you’ll need to negotiate a new arrangement (the blend and extend) before you can port it.
On the other hand, if the new mortgage value is 0-25% lower than your current mortgage, you may have to make a large prepayment on your current mortgage before you can port.
Your Interest Rate
Generally, the portability feature is only reserved for mortgage terms with fixed interest rates. You can not port a variable rate mortgage.
Variable-rate mortgages are mortgage loans whose interest rates change with Canada’s prime rate. Luckily, most variable-rate mortgages can be transformed to fixed-rate and then ported.
Your Credit Score Rating
You have to meet your lender’s minimum credit score requirement (e.g., 680+) to be able to port your mortgage. If not, you may be declined or end up paying at a higher rate.
Note: Not all lenders allow porting a mortgage. If you intend to move house during your mortgage term, you need to be sure your lender is portable. Your mortgage broker should be able to tell you this.
Mortgage Porting Challenges
Issues like stricter lending requirements, changes in your circumstances, new government regulations, and so on have made porting a mortgage trickier. Let’s discuss some of the reasons you may not be allowed to port a mortgage so you can prepare ahead.
Inability to Prove Your Income
You may face challenges porting your mortgage if your documented income is not adequate, e.g., if your income has fallen since your last approval. A common example is if you go self-employed, but you don’t have the two-year tax returns required to prove you have sufficient earnings.
High Debt Ratios
Another reason your lender could decline your request to port your mortgage is if your housing obligations and monthly debts are too large as a percentage of your total monthly income.
This became an even bigger issue after the January 2018 mortgage stress test increased the interest rate used to test borrowers’ qualification by 200+ basis points)
Your New Property Doesn’t Close in Time
Lenders set the specific number of days within which you have to complete the port. It varies with each lender and is usually in the 30 to 120 days range.
Some only allow same-day ports, while only a few allow up to 365 days.
If your lender allows just 30 days to complete a port, you will likely find it difficult to complete your old house’s sale and complete your new house’s purchase within this period.
Your Property is Not Eligible
The lender can refuse to lend on your new property if it has marketability issues. Houses with building faults, condo issues, live-work units, leasehold land, and other potential marketability issues will likely be declined.
You Have a Variable Rate Mortgage
Not all mortgages are portable. Most lenders don’t port their variable-rate mortgages, so you may have to break it and pay the penalty. However, your lender may allow you to convert your variable rate to a fixed-rate mortgage and then port it.
Also, some lenders may refuse to port mortgages with a Home Equity Line of Credit component (HELOC).
Your Lender Does Not Offer Bridge Financing
Suppose you close your new property before the old one; you’ll have to bridge the down payment until you receive the cash from the sale of your old house.
The challenge is not all lenders offer bridge financing.
If you need bridge financing and your lender doesn’t offer it, you can try to get it somewhere else. If that doesn’t work out, you might end up breaking the mortgage.
Your Property is Located Outside the Lending Area
Many non-bank lenders have limited lending areas. For example, you can’t port outside the province if you’re with a credit union. Other smaller lenders have limitations on rural properties, particularly if the mortgage has no default insurance.
You Need More Funds
If you are upgrading to a new home, this is a common requirement. However, some non-bank lenders will only allow you to port the same dollar amount. If you are buying a more expensive home, you may have to come up with the difference in the mortgage amount.
Even if your lender allows you to port and borrow more money for the difference, they may not give you their best rates on the new loan amount. This is because they already know you don’t want to pay the penalty to leave, reducing your negotiating power.
Your Lender May Want to Extend Your Maturity Date
You may face this challenge if you wish to maintain your maturity date. Some lenders demand that you get a new 5-year term when you port, and this will lock you in longer than you prefer.
If You Have a Poor Credit Score Rating
Lenders view borrowers with a poor credit rating as high-risk. So they either reject such applications or ask for a higher rate. Therefore, if your credit rating has fallen, your mortgage lender may not agree to port your mortgage.
However, if you will be downgrading your mortgage or moving to a property of equal value, your lender may allow you to port since the debt already stands and you are not borrowing extra money. But if you intend to port and borrow extra, your poor credit will get in the way, and you may be rejected.
What does it Mean to Assume a Mortgage?
Assuming your mortgage simply means transferring your current mortgage to your home’s buyer. Unlike when porting a mortgage, assuming a mortgage makes sense when you are not buying another home after selling your home.
If your mortgage rate is lower than what is available on the market, allowing your buyer to assume your mortgage will make your property more appealing. The buyer, however, has to keep in mind that he’ll pay for the difference between the purchasing price and the mortgage.
Look at this scenario: If your outstanding mortgage balance is $350,000 and you are selling the home for $450,000, the buyer would assume the mortgage and pay you the difference ($450,000 – $350,000 = $100,000).
Before going ahead, ensure that the buyer is eligible and can be approved for the financing. Also, make sure you strip all your responsibilities from the original mortgage agreement.
Keep in mind that you can still be held responsible if the buyer defaults on the payments in the first 12 months. After this period, you are completely off the hook.
Porting a Mortgage Canada vs Breaking a Mortgage vs Assuming a Mortgage
When you buy a home and decide to move to another before the end of your term, you have three options: breaking your mortgage, porting your mortgage, or assuming the mortgage.
The table below compares these options, when they make sense and when they don’t:
|Porting a Mortgage||Breaking a Mortgage||Assuming a Mortgage|
|Description||You transfer your existing mortgage, along with its rates and terms, to a new property.||Completely cancel your initial mortgage agreement||You transfer your current mortgage agreement to your home’s buyer.|
|When does it make sense?||You’re purchasing a new home at the same time you’re selling your current home.||When your current mortgage rates are much lower than your existing mortgage rate or when you are not purchasing another property||Your current rates are higher than your existing rate, and you aren’t buying a new home.|
|Downside||If your mortgage is a variable rate mortgage, your chances of porting it are very slim.||You may have to pay a huge prepayment penalty||1) The buyer has to agree to it.|
2) You bear all the consequences if the buyer defaults in the first twelve months
3) You have to be paid the difference between the mortgage and the purchase price
FAQs on Porting a Mortgage
Bottom line: Is Porting a Mortgage the Right Step?
Whether you expect to use it or not, the ability to port your mortgage is a feature you should have. If you intend to move to a new home during your mortgage term, then it’s a must. However, like every personal finance decision, porting a mortgage has its benefits and downsides. So consider them thoroughly and do your research to know if porting is the right decision for you.