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Buying a new home before your mortgage term ends can be a costly affair due to prepayment penalties. However, homeowners in Canada have the option to bring their existing mortgage to their new home through a process known as mortgage porting.
In this comprehensive guide, we explore everything you need to know about porting a mortgage in Canada. Below is a brief overview of what you can expect to learn in this article:
- What is Mortgage Porting?
- The benefits of porting a mortgage.
- How to know if you are eligible to port a mortgage?
- How to port a mortgage.
- Pros and cons of porting a mortgage.
- Frequently asked questions.
Read on to see if Mortgage Porting is the best option for you.
What Is Mortgage Porting?
Mortgage porting also referred to as transferring a mortgage, is a financial strategy where homeowners can transfer their existing mortgage along with its current rate and terms from their current property to a new one. This allows homeowners to avoid potentially hefty prepayment penalties.
Why Port A Mortgage?
There are several reasons why homeowners might opt for porting a mortgage, the main reasons being:
Avoid Prepayment Penalties
The majority of mortgage contracts in Canada span about five years. If you decide to break your mortgage contract midway, you are likely to incur substantial prepayment penalties. Prepayment penalties are pentalties incurred for paying off a home loan earlier than the agreed-upon date, causing the lender to lose out on interest payments. This penalty is typically a percentage of the remaining loan you paid off. By porting your mortgage, you can conveniently avoid these penalties.
Retain a Competitive Fixed Rate
If you had secured a low fixed rate for your existing mortgage, porting allows you to carry that same favorable rate over to your new property. This is beneficial if interest rates for mortgages are rising. Porting an existing mortgage with lower rates will help you avoid potentially higher interest rates at the time.
Porting Eligibility
Before you decide to port your mortgage, it’s crucial to understand whether you qualify for it. Here are some key factors that determine your eligibility:
Type of Mortgage: Generally, fixed-rate mortgages are more likely to be portable. If you have a variable-rate mortgage, your lender may require you to switch to a fixed rate before you can port your mortgage.
New Property’s Purchase Price: If you intend to buy a more expensive property, you might have to consider a “blend and extend” mortgage. This involves porting your existing mortgage and borrowing the additional amount needed from your lender, which could result in a blended interest rate.
Current Financial status: Your lender will need to evaluate your current financial situation before approving the port. This involves assessing your credit score, debt service ratios, and requires proof of income and employment.
How To Port A Mortgage
If you qualify for mortgage porting and decide to proceed, here are the steps you will need to take:
1. Check with Your Lender: The first step is to consult with your current lender to understand whether your mortgage has a portability feature. If it does, they can guide you through their specific process.
2. Evaluate the Financial Implications: Assess whether porting your mortgage makes financial sense for you. This would involve comparing the costs and benefits of porting versus breaking your mortgage.
3. Apply for Porting: If you decide to go ahead with porting, you’ll need to apply with your existing lender. They will reassess your financial situation, conduct a credit check, and perform a property appraisal on the new home.
4. Close the Sale and Purchase: Once your lender approves your application, you’ll need to close the sale of your current property and finalize the purchase of the new one within a specified period (typically between 30 to 120 days).
Pros And Cons Of Porting A Mortgage
Like any financial strategy, porting a mortgage comes with its own set of advantages and disadvantages.
Pros
Retain Favourable Terms: Porting allows you to carry forward your current mortgage’s beneficial terms and low-interest rate.
Avoid Prepayment Penalties: Since you’re transferring and not breaking your mortgage, you won’t be charged prepayment fees.
Lower Monthly Payments: If interest rates have risen since you negotiated your existing mortgage, your payments will be lower than if you signed a new mortgage contract.
Cons
Limited Time: Lenders usually offer a window of 30 to 120 days to complete the porting process. This could be challenging if you’re trying to sell your home in a slow market.
Potential for Higher Rates: If other mortgage providers have better rates than your current lender, porting might not be the best option.
Re-qualification Process: Porting a mortgage can require document collection, income verification, and property appraisal, which could potentially lead to delays.
Frequently Asked Questions
Q: Can all mortgages be ported?
A: Not all mortgages can be ported. It largely depends on the terms of your current mortgage and the policies of your lender.
Q: Can I port my mortgage to a more expensive home?
A: Yes, you can port your mortgage to a more expensive home. However, this could result in a “blend and extend” mortgage where you’ll need to borrow additional funds from your lender.
Q: Will porting my mortgage affect my credit score?
A: No, porting your mortgage does not have an impact on your credit score.
Q: Can I port my mortgage to a less expensive home?
A: Yes, you can port your mortgage to a less expensive home. However, you might face a prepayment fee on the amount by which your mortgage decreases.
Q: What if my mortgage is not portable?
A: If your mortgage is not portable, you might have to break your mortgage and pay the associated penalties. Alternatively, you could consider refinancing or transferring your mortgage to the buyer of your current home, if those options are feasible.
Should I Port My Mortgage?
In conclusion, porting a mortgage can be a beneficial strategy for homeowners looking to move houses or acquire a different house without disrupting their existing contracts. However, doing so requires thorough research and an understanding of the process, your eligibility criteria, and the potential financial implications. Make sure you consult with your lender, as well as a mortgage advisor or broker to ensure you make the most informed decision to stay on track for your long-term financial goals.
