How to Move Your Mortgage with You!
- Home Buying Tips
- Friday, August 23, 2019
So, you are looking to sell your current home and build a new one (or buy a newly-built
quick possession home). Does this mean you have to break your existing term-rate mortgage and pay a penalty? Absolutely not! In Canada, you often have the ability to transfer – or “port” – your remaining mortgage rate and term to your new home, instead of going through the mortgage re-approval process again.
And if you are purchasing a higher-priced home, you can apply for a second mortgage from the same lender to cover the difference or consolidate payments through a new mortgage. Let’s take a closer look at this relatively simple process!
When does it make sense to port a mortgage?
By porting a mortgage, you will not pay the penalty for breaking the mortgage before it expires. This penalty will be higher the more time you have remaining on the term – and decrease as you approach the end of the term. If you are happy with your current lender, porting the mortgage allows you to maintain your existing relationship.
That said, if you only have a small amount of time remaining on your original term mortgage, the penalty may be relatively low. Terminating the mortgage and paying the penalty may be worth considering if you would like to take your mortgage to a new lender – perhaps one who can get a better rate, or offer you better client services.
How does a mortgage transfer work?
All you need to do is tell the bank or lender that you plan to sell your current home – and will be transferring the mortgage to your new home once the sale goes through. As with any mortgage application, they will require documentation on the new home and will conduct an assessment to determine if you qualify for the additional funding.
Two common options for transferring a mortgage
Assuming your new home has a higher value than the one you are selling, you will need to increase the amount of your mortgage. There are two common approaches to structuring a transferred mortgage. It can be done as a split mortgage, or as a blend and extend mortgage.
Option 1: Split Mortgage
With a split mortgage, you will have two smaller mortgages versus one larger one.
The first mortgage is basically your existing mortgage applied to the new home. The term, rate and balance of the original mortgage remain unchanged.
You then apply for a second mortgage from the same lender to cover the remaining balance on the home price.
This approach gives you a great deal of flexibility in choosing the type of mortgage you want for the second mortgage. For example, it can be a fixed-rate mortgage, variable mortgage or blended rate mortgage. It’s up to you.
Option 2: Blend and Extend
Many lenders offer the option of a blend and extend mortgage.
The existing mortgage rate is blended with the lender’s current rate over a new set term. The resulting mortgage rate will fall somewhere between the two rates. In this scenario, you will only have one mortgage payment instead of two.
Again, there is no cancellation fee as the existing mortgage is simply ported into a new one.
What if I’m building a new home?
There is a common misconception that if you build a new home, you will need to juggle two mortgages while construction is taking place. Fortunately, this is not the case!
“You do not need a mortgage while the home is being built. The builder will just require an up-front security deposit.”
The only exception to this is a construction draw mortgage (typically for custom new home builds where funds are required at various stages of completion). In this case, Miller says you would need to carry two mortgages.
Most term mortgage rates can only be guaranteed (or held) for 120 days. Since the average new home construction period ranges between six to nine months, this means you can’t lock into a mortgage rate available at the time of purchase.
Instead, you’re advised to wait until approximately four months ahead of your possession date to shop for the best rate. Miller notes that a few lenders will hold rates for up to two years, but these are generally set at a higher rate.
A few additional things to keep in mind:
- You do not require a lawyer to port a mortgage. It is simply a financial transaction between you and your bank.
- If you have two mortgages on the same home, they must be from the same bank or lender.
- Not all mortgages are transferable. For example, most variable-rate mortgages fall into this category.
When transferring a mortgage, it’s wise to get advice from a mortgage professional. A mortgage professional can help you weigh your options and make the best decision based on your individual circumstances. You can work with a bank or financial institution, or seek the services of a mortgage broker who can shop around for mortgage rates on your behalf.