I think one of the new strengths of Young and Thrifty is the wide variety of experiences that both “Young” and myself bring to the table. Perhaps the best example of this is in our mortgage situations. While Young has written extensively about her new-ish mortgage in the thriving urban market of Vancouver, I have opted for a much more low-key approach in rural Manitoba. I purchased a nice starter home in a small town for $95K in July of 2010. The house is 988 sq. feet, has a large 2 car garage, finished basement, a deck, 3 bedrooms, 1.5 bathrooms, and came almost fully furnished. Needless to say, my mortgage and home ownership experience is different from that of most Canadians.
Is Now The Time To Lock In?
Regardless of the specifics, there are some similarities across all mortgages – namely that the bank needs to reach in and take a decent amount of your net pay periodically. It is a constant source of amazement to me how many people spend hours poring over the latest way to save 20 cents on a bottle of ketchup, or unplugging the TV after they use it every time, only to agree to mortgage payments without reading the fine print or negotiating; therefore, even though I have 12 months before the current term on my mortgage is up, I am already exploring a few different options I will have going forward. My original mortgage was through a mortgage broker since I didn’t have the 20% down that the big banks wanted. It was for 3 years (3.69% interest rate, 25 year amortization). I missed out on some great variable deals that were available at the tim
e because I didn’t have the necessary equity needed to qualify. At the time, I was just happy to get the financing in place in time for my move to start a new job, and lock in the low price I paid for the house (it has proven to be a pretty great bargain so far). Now that I am more experienced with financial matters and have more time to explore the options available on the Canadian mortgage scene, I am trying to choose the ideal option for myself going forward.
Weighing My Options
The last couple weeks I have been doing quite a bit of a reading on Canadian mortgage rates, and where the market is going. The conclusions I have come to are very interesting (if you’re still wondering what all this has to do with porting a mortgage, I promise we will get there). The traditional discounts available for variable mortgage rates have all but vanished. I’m not sure if that is because of the record-low prime rates we are seeing, or what the deal is, but the result is consistent across all types of lenders. Ordinarily, I would dispassionately look at the long-term variable vs fixed numbers and figure on saving money in the long run through choosing variable rates over the whole term of my mortgage. These are not ordinary times however, and it appears most Canadians are thinking like myself and trying to lock in these ultra-low rates for the foreseeable future.
Considerations For Porting Your Mortage
I’m sure I’ll eventually get around to comparing the 5-year and 10-year mortgages for my personal situation, in addition to looking at some 1-year variable options, but for the time being I wanted to see what my options were if I wanted to lock in some low rates, yet still have the flexibility to move if I want to (there is a large chance my girlfriend and I will look at moving in 2-4 years). So I did some research into how to port a mortgage, and what “porting a mortgage” even consisted of. Here is a basic summary of what I found:
1) Porting a mortgage is the basic idea of transferring the debt you owe to the bank from one asset (your old house) to another (your new house). There are three basic scenarios if you decide on this option. If you choose not to port your mortgage and transfer it over to a new house, then you can always pay the penalty on the past mortgage and then simply shop around for the best new deal. The three basic scenarios that you are looking at if you choose to port a mortgage are:
i) You’re transferring the exact same mortgage over to your new property
ii) You need to borrow more money to purchase your new property than you borrowed on your old mortgage (you need to add to your mortgage)
iii) You have borrowed more money than you need for your new mortgage.
2) Porting a mortgage really only makes sense if your current mortgage rate is lower than the ones being offered on the market. Otherwise you might as well pay to break the contract (usually a 3 month penalty) and renew.
3) If you’re new mortgage puts you in our first scenario, it’s very simple. The old mortgage is a signed contract that both sides must honour; therefore, it is usually quite easy to simply transfer it over.
4) The second scenario listed above is probably the most common in my estimation (people upgrading their house). The terms of the original mortgage contract still stay in place for your new property. That means that if you borrowed 200K at 3%, that amount of money will still have that rate until the end of the term. HOWEVER, the difference in the price of the new house (minus your down payment) and new mortgage (the amount added to the old mortgage) is dealt with almost as a separate contract. You have to negotiate a separate rate for this amount of money, and then most lenders will “blend” the rates together in order to make the new mortgage contract simpler to understand. I’m a little weary of this option because you don’t have much negotiating room in terms of bargaining on the new rate if you already have one mortgage with that bank. I’d also be very careful about know the mechanics of this “blending process” before I signed on any dotted line. There are definitely savings to be had with this option, but just make sure you read the fine print.
5) The final option has the most variables. If you are downsizing, and need less money than your old mortgage provides, there are some options, but unless your new mortgage rate will be quite a lot higher than your old one, you might be better off simply breaking the mortgage and negotiating anew. If the new mortgage is 1-25% less than the old one, you might be able to simply make a large pre-payment on the old mortgage before porting it over, with no penalties. If the difference is more than this, the lender of your mortgage could charge you the full penalty to break the mortgage, or it could work out a custom agreement with you on the breaking of the contract in order to keep you on as a customer.
6) It is important to note that having the ability to port your mortgage is not a given. From what I read, it appears as if it is a feature you can add into your mortgage contract at no extra cost at the big banks in Canada. I’m not sure if this is similar for mortgage brokers and/or credit unions. Make sure and ask for this specifically if you are in a situation like mine, where you are considering moving in the future. I would guess most lenders would be willing to work with you in this low rate environment, but if rates start to rise steadily, they might get more sticky.
7) An interesting alternative to porting your mortgage is actually to sign your mortgage over to the new buyer. The bank usually doesn’t mind this since it has to honour the contract one way or another, and it may lock in a new customer. I’ve heard of people using low mortgage rates as a selling feature. Personally, I don’t think this has enough benefits to worry about, and homeowners would not value it enough for you to get much mileage out of it (homebuyers are fairly notorious for going with their gut, and not their spreadsheets).
When doing the math on whether it makes sense for you to port your mortgage over to a new property, make sure and compare the fees from breaking the mortgage contract to the money you believe you will save by keeping your lower interest rate for the length of your term.
Do any Y and T readers have any further insights or experiences with porting a mortgage and some of the unique details they encountered?
I would not worry in 4) about blending because the goal for the bank is to keep you around and borrow. If you blend and extend, it’s a bonus for them. I have never finished a term as I have always done a blend and extend by watching the rates.
I have “ported” my mortgage twice and it’s not a big deal really. The bank wants your business. They will either be flexible or not. You may have to decide if paying a fee for breaking your mortgage is worth it and that’s it.
I stumbled upon a 2010 Money Sense magazine discussing the crazy low rates and how you had to plan to lock in for long … 2 years later, the rates are still low. Where rates will go is unknown… It will go up but when is the question and is it worth paying more for 2 or 3 years is a question to think about.
Thanks for input PIE. Glad to hear you’ve had good experiences. Just out of curiosity were the rates lower when you “blended and extended” because that would makes things easier I’m sure. Also, if you don’t mind me asking, were you with one of Canada’s big six? I’m fairly certain rates will stay low for the next two years, after that, I don’t think anyone knows. I don’t care what Mark Carney says, we can’t raise our dollar when the American one stays so beaten up, it will kill our export industries.
What surprised me is my current mortgage provider was not willing to play ball and be competitive. I had 5 months left of my current mortgage when I started looking at houses. 1 month will be left on my current mortgage at the time I close. My new mortgage will be larger than my current one.
My current provider (not a big bank, but fairly larger and well know mortgage provider) was going to charge me a penalty and make me pay a blended rate the remaining month of my term.
Kind of shocking to be honest that they wouldn’t bend over backwards to keep me as a customer. They fees they’d waive would pale compared to the amount they would make on the 10 year mortgage I’m getting.
This is exactly the sort of experience I was worried about. Dumb business, but they have probably done studies that show that people won’t go through the process of switching banks. If enough people are intimidated by the process, or are simply that lazy, then the banks stand to make a huge profit.
Be careful on option 2. Most mortgages have a “3 months interest or interest rate differential – whichever is more clause”.
The interest rate differential (IRD) can be quite costly depending on the gap between your current rate and the new rate, and how many years you have left on your mortgage. Many providers will use the rate that most closely matches the remainder of your term (so if you have two years left, they will use the two year rate which creates an even larger differential).
At the end of the day – calculate how much how much the penalty to break your mortgage will be and home much interest you will pay if you port your current mortgage vs how much interest you would pay with a new one. Which every comes out lowest of the two wins.
Definitely great advice Jim. I’m a huge fan of dedicating an hour or two to crunch numbers and possibly save thousands of dollars over the length of your mortgage (and consequently, probably thousands more in interest).
Thanks for sharing very Informative Post!
Need help. I am porting my mortgage and am taking less money. I have purchased a new house that is less then my existing. I have decreased my mortgage by the 15% allowed before penelty. Now my broker is telling me that I have to maintain my % down payment that I made when I first got this mortgage. Is this normal procedures when porting decrease?????I now will have to pay a penetly on the difference.
I’m not sure I understand the question Debbie, what doesn’t “maintain my % down” payment mean exactly? I’m not an expert in this field to be honest, but if you’re looking to renew the mortgage contract with the bank you are at they would probably be accommodating if you negotiate with someone that is high enough up the management chain to help you out. I might try pitching the fact that if they are strict about these rules you’re going to take all of your assets and go with cheap online banking. This is really your only leverage, but it is a solid card to play in a negotiation.