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Buying a new house can be a thrilling experience, but it can also come with an avalanche of decisions to make. Aside from choosing new paint colours or furniture, one of the biggest things to consider is whether to break your current mortgage contract (which can come with penalties and fees) or to transfer your current mortgage to your new home and keep your existing mortgage term, rate, and lender. This process is called porting a mortgage and is a viable option in some new home purchases.
How Does Transferring a Mortgage Work?
When you port your mortgage, you are taking the mortgage contract and rate that you have with your lender and transferring it from your old home to your new one. You can only port your mortgage if you’re purchasing a new property at the same time you’re selling your old one. People primarily port their mortgages to avoid paying the penalties associated with breaking your mortgage contract term (for example, in year two of a five-year term,) or to avoid the hassle of applying for a whole new mortgage again.
You’ll still have to pay a fee to port your mortgage, and you’ll have to pay to have an appraiser review your new home, but those fees are usually lower than the steep penalties you’ll pay for breaking your mortgage early.
Is Porting Your Mortgage a Good Idea?
There are two primary scenarios where porting a mortgage is advantageous to you. The first is if you have to break your mortgage term to purchase a new home. The penalty for breaking a mortgage term ahead of schedule can be high. While the penalties vary from lender to lender, the worst you can expect to pay is three months’ worth of loan and interest payments.
The second scenario where porting your mortgage is smart is if you have a lower interest rate on your mortgage than current market rates. Holding on to your lower interest rate can be very beneficial and could save you thousands of dollars in interest charges over the remaining term.
Can You Port a Mortgage?
Several factors determine whether you can port your mortgage, so consider these before making this part of your financial plan.
Your Mortgage Contract
First of all, not all mortgages can be ported. Your lender should have mentioned whether your mortgage is portable when you signed your loan papers, and if your mortgage doesn’t allow for portability, you can’t negotiate it as a term after the fact. Fortunately, most mortgages offer portability as an option, so if you don’t remember your lender covering it when you signed your loan papers, don’t rule it out. Just call your lender and ask them whether your mortgage is portable.
Your Interest Rate
Portability is a feature that is generally reserved for fixed interest rate mortgage terms. If you have a variable interest rate (which means it doesn’t fluctuate with Canada’s prime rate), then your mortgage may not be portable. Fortunately, most variable rate mortgage terms can be converted to fixed-rate, and from there, ported.
Your New Home’s Purchase Price
Your new home’s purchase price will also affect whether you can port your mortgage. If your new home has a different value than your old one, you may need to make some adjustments to achieve portability. For example, if the value of the required mortgage on your new home is 0-25% lower than your current mortgage, you might need to make a large prepayment on your existing mortgage before you can port it.
On the other hand, if your new home is more expensive than your current home and needs a bigger mortgage than you currently have, you’ll need to negotiate a new agreement with your lender. This scenario is so common that this type of mortgage has a name: the “Blend and Extend” mortgage. The final interest rate on this mortgage is usually somewhere between the old and new rates.
Keep in mind that if applying for a bigger mortgage, you’ll need to go through lender screening again, even if you already have a relationship with your mortgage provider.
Porting a Mortgage vs. Switching to a New Lender
The alternative to porting your mortgage is to obtain a new mortgage with a new lender. If you only have a few months left on your mortgage contract and the rates are lower with another lender, it's an option worth exploring. But here’s a handy chart to compare your two options and help you decide what works better for you.
|Porting a Mortgage||Switching to a New Lender|
|Interest Rate||Same as old rate||Today’s market rates|
|Lender Screening||Only if you need a bigger mortgage||Yes|
|Mortgage Term||Same as current term||Choose your term|
|Interest Rate||Fixed||Variable or Fixed|
|Penalties||No||Up to three month’s loan principal and interest|
Finding the Best Mortgage Lenders in Canada
If you are confident that your home’s mortgage is portable and you can afford any prepayment that is required to port it, you can contact your lender to get started, and they will walk you through the process. It's a lot of paperwork, but the good news is that they will do most of the heavy lifting.
However, after crunching the numbers, you may decide that finding a new mortgage lender may be the better option. For instance, if you only have a few months left on your current mortgage contract and ower interest rate are available elsewhere, breaking your mortgage, paying a small(ish) penalty, and going with a new lender may make the most financial sense. If you decide that breaking your mortgage contract is the better option vs. porting, shop around to find the best mortgage lenders in Canada.
A second option: instead of porting your mortgage, you could offer to sign it over to the buyers of your home. That frees you up to find a new and lower mortgage interest rate without breaking your contract. Depending on your mortgage interest rate is, this offer can be seen as a selling feature since it lets the buyers take advantage of that potentially low-interest rate, and also helps you avoid paying those hefty penalties for breaking your mortgage.
In either scenario, you’ll need to apply for a new mortgage on your new home. For the best mortgage interest rate, consider an online lender like motusbank or a reputable credit union like Meridian. Looking at the rates, Meridian has some great fixed and variable rate mortgages, with their 5-year, closed fixed-rate mortgage at 2.59% and their 5-year, closed variable rate mortgage at 2.90%. Likewise, motusbank has some very competitive rates, and since it’s an online bank, you can do the entire application online in under 10 minutes.
Regardless, it always makes sense to shop around to ensure you receive the absolute lowest interest rate on your mortgage.
Is Porting a Mortgage the Right Decision?
Porting a mortgage has benefits and disadvantages, and you should be careful to consider them fully before deciding to port or refinance your mortgage. Make sure that you’ve carefully considered the potential prepayments and the legwork involved with porting your mortgage. If the numbers work, it can usually be an easier way to obtain financing on a new home while avoiding penalties for breaking your mortgage contract, excessive paperwork, and preserving the lower mortgage interest rate from your previous home.
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