What to Do with Your Current Mortgage When You Buy a New Home?
There’s no question that buying a new home can be an incredibly exciting time. A new home holds the prospect for a great new chapter in your life; it opens up a world of new opportunities for you to explore; and it can be quite rewarding financially, too. In many cases, a new home is the result of years of saving, and perhaps greater financial flexibility.
Check out our chat with Barry Patchett from Dominion Lending about what you need to know when porting a mortgage:
Buying a new home is incredibly exciting, but it can also feel quite complicated at times – particularly when it comes to mortgages. Getting your first mortgage, for your first home, is at least easier to understand (if not always simple). But to the question of what happens with a pre-existing mortgage when you’re moving to a new home, there aren’t necessarily obvious answers (unless you happen to be a mortgage broker).
This article will be most salient to first-time sellers: people who have purchased their first home, currently have a mortgage, and are looking to sell this home in order to buy a new one. For many people in this situation, it will be the first time encountering the question of existing mortgages and new homes.
That said, there will be tidbits of wisdom sprinkled throughout that just about anyone involved in the real estate process could benefit from. As we often say: the more information you have, the better you’ll be able to make important decisions.
You are selling a home for the first time. You have a mortgage on this home, and you are looking to purchase a new home. What are your options?
Know Your Mortgage
First and foremost, it’s important to know all the details and particulars of your mortgage. Mortgages may seem puzzling from afar, and because the details of mortgages aren’t exactly common knowledge, the significant differences between one mortgage from the next may not be immediately apparent. It’s like trying to read in a language you don’t yet know: we need to learn the basics.
So: what type of mortgage do you have? The details of your current mortgage will dictate the opportunities available to you when it comes to porting it over when buying a new home (don’t worry – we’ll discuss porting it over shortly). One of the first things to figure out: is it a Variable Rate Mortgage, or is it a Fixed Rate Mortgage?
Beyond the type of mortgage, it also matters which company or lender your mortgage is through. Whether through a bank or a private mortgage lender, they will set the precedent on whether or not your mortgage is portable.
Many mortgages in Canada are portable; however, most Variable Rate Mortgages are not portable. So mortgages have a specific penalty outlined for situations like buying a new home, and porting the mortgage over. Let’s take an opportunity to define that term.
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Porting Your Mortgage
This is at the heart of what we’re discussing today, so it’s important to be clear about what exactly it means. When you first get a mortgage, it is for a specific property. If you decide to sell that specific property before maturity in order to buy a new one, you can sometimes port your mortgage to the new property.
Porting your mortgage means that once you have sold your initial property – the one the mortgage was tied to – the mortgage will be switched to your new property. This means the rate you’ve been paying, and the terms and conditions, will remain the same. This is a particularly attractive option for homeowners who have a competitive Fixed Rate Mortgage (as noted, Variable Rate Mortgages are seldom portable).
A blended mortgage is a useful form of porting. In this instance, again typically with a Fixed Rate Mortgage, you will take the existing mortgage to your new home, at the existing amount and rate. For the extra amount, the rate will be a ‘blend’ between your existing mortgage rate, and the rate of the new mortgage.
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Breaking and Assuming
There are two other options when it comes to what happens to your mortgage when you sell the affiliated property before the maturity date. One is Breaking Your Mortgage: this is when you cancel your original mortgage outright.
This might be done if you’ve decided not to buy a new home, or if you (or your mortgage lender) have found a substantially better rate elsewhere. The reason we specific ‘substantially better’ is that breaking your mortgage often incurs a payment penalty, which can be quite large. Often, the penalty is equal to (or, in Fixed Rate, sometimes greater than) three month’s interest. Because banks use posted rates, private lenders often involve lower penalties.
Beyond Porting Your Mortgage and Breaking Your Mortgage, there is also ‘Assuming.’ This takes place when you have sold your home, and the buyer agrees to take over the current mortgage. Essentially, your mortgage agreement is transferred over to (or ‘assumed by’) the buyer. The buyer will simply pay you the difference between the mortgage amount and the price of purchase. Note that
Before we move on, we’ll reiterate one more time: the options and opportunities available to you will be determined by the particulars of your mortgage, and the lender or company your mortgage is through. Some may involve greater penalties; some may not be portable. Understanding your mortgage, and knowing what this means for what potential actions you can take, will allow you to make an informed decision.
You Don’t Need to Wait
First a definition: a mortgage term is the period of time in which the specifics of your mortgage remain the same; after each term, you will renew the mortgage with potentially different rates. By contrast, the amortization period is the overall amount of time before the mortgage is fully paid off; amortization periods may include several mortgage terms.
Most mortgage terms are in five year increments. Because of this, many people believe that that is the length of time they must wait before purchasing a new home. This is not the case, though. Increasingly, people are moving three years into their mortgages. You do not need to wait for the five year mark before selling your home; three years is completely fine. If you find the new home of your dreams, or a great financial opportunity, you do not need to wait.
Go for Mortgage Broker
It’s not uncommon to for a homeowner to have a mortgage, but not know what precise type of mortgage it is. That’s when your friendly neighbourhood mortgage broker swings into action: you can learn the precise details mortgage, and what that means for you. Given your specific mortgage, and the point at which your mortgage presently sits, what’s the best opportunity available for you?
Beyond that, a mortgage broker will have the depth of experience necessary to provide the best advice for you – for your specific situation – in all decisions pertaining to your mortgage, whether a new one, or a ported one.
This is one of the key reasons why WRX Property Group recommends using a mortgage broker. Buying a home is not only a personally important process, but it is also a financial decision that will factor into your life for years to come: for many people, a home is the single most expensive purchase they’ll ever make. And a mortgage broker will ensure you find the best arrangement.
We also recommend using a mortgage broker as opposed to a bank because, simply by their nature, they will provide you with more options. Whereas a bank is limited to their going rate, mortgage brokers will investigate a wide range of potential lenders in order to find the best opportunities for you; in addition, they will help decide which specifically is best-suited.
A mortgage broker will paint a fuller picture for you, weighing the pros and cons of each opportunity. They are not limited to a specific set of products, as banks are, as are private lenders if you stay with one. If there are penalties, for example, the mortgage broker will let you know – when it comes to finances, surprise penalties are never a good thing.
It’s important to note that mortgage brokers work on commission: they only get paid if they work everything out for you. If you weren’t initially considering a mortgage broker, the fact that they have financial incentive to go above and beyond for you is a compelling one.
The gist of this is: know your mortgage. Often, selling your current home in order to buy a new one can be a wise decision, and by knowing your mortgage, you’ll best be able to decide how to go about handling an existing mortgage and a new home. If you’d like to know more, or if you’re looking to buy a home in Kitchener-Waterloo and the surrounding areas, please don’t hesitate to contact us. We’re always happy to help.
Written by Will Kummer