June 13, 2024

Selling your house and porting a mortgage: how to do it?

Are you looking to sell your current home and buy a new one? It’s simple if your mortgage is at the end of its term, but if there are two to three years left on it, how can you avoid breaking your mortgage early and incurring a prepayment penalty? One option is transferring or porting a mortgage. Depending on your situation, this could be your best option.

What is porting a mortgage?

When you sell your home and buy another one, you can transfer your mortgage to your new home before the end of its term, along with its current rate and terms. This is only possible if you sell your old house and buy a new one at the same time.

Transferring a mortgage from your old house to your new one is often confused with subrogation, which is a transfer of your mortgage balance from one financial institution to another, and assumption, which is a transfer of your mortgage to a buyer.

How does porting a mortgage work in Canada?

If you decide to sell your property before the end of your term, you can apply for a mortgage transfer. Note that this is not possible with all financial institutions and mortgage contracts. If that is the case, you will need to pay a prepayment penalty and choose a new mortgage with new terms and conditions for your future home.

Are all loans transferable?

Unfortunately, a mortgage transfer is not possible for most variable rate mortgages. You may be eligible if you have a fixed rate mortgage. The best way to determine your eligibility is to contact your financial institution.

How does a transfer work when buying a more expensive property?

Consider this scenario: You’re in your third year of a five-year term. Your current mortgage is $450,000 with a 2.75% interest rate. You buy your new property for $650,000 with a 6.25% interest rate. You therefore need an additional $200,000 in financing.

A mortgage with blended rate: Your financial institution could grant you a blended rate between your mortgage’s rate and current interest rates. Your term would also be over five years. That’s the first option.
Hybrid mortgage: The second option is a hybrid mortgage. This means you would have two rates on your new property. The first would be the initial rate of 2.75% for the remaining two years on the term, and the second would be negotiated with your lender according to your desired term, conditions and current interest rates.

	Tips and tricks If you have to take out a bigger loan for your new home, some financial institutions offer a mixed or combination mortgage, which means that one portion of your loan has a fixed rate while the other has a variable rate .

How does a transfer work when buying a less expensive property?

Let’s imagine you’re in the third year of a five-year term. Your current mortgage is $450,000 with a 2.75% interest rate. You buy a cheaper house for $350,000. In this case, you may have to pay a prepayment penalty on the difference (i.e., the $100,000).

Transferring and refinancing your mortgage for renovations

Are you lacking the funds for renovation work on your new home? Mortgage refinancing could be an option. Access the funds you need for renovations by borrowing against the home equity you’ve accumulated.

Another great solution for renovations is to take out a home equity line of credit. Make sure to consult your mortgage broker.

	Tips and tricks It’s best to start shopping for a mortgage and ask your lender about mortgage transfers roughly three to six months before buying a home.

Why transfer a mortgage?

There are a number of reasons for porting your mortgage. For example, if you like your current rate and terms and want to keep them, if you want to avoid a prepayment penalty or if you don’t want to change financial institutions.

There are always pros and cons to transferring your mortgage.

Benefits of transferring a mortgage

You usually avoid paying a prepayment penalty if you choose this option, but there may still be fees. However, there are often fewer fees than if you break your contract early, which often results in high penalties depending on the remaining term.

Another benefit is that if interest rates have increased since the initial loan, you get to keep a better interest rate and keep your payments lower. Additionally, a mortgage loan transfer helps you to maintain some financial stability because your mortgage payments will remain the same if the new property has an equivalent value and/or the mortgage amount has not increased.

Disadvantages of transferring a mortgage

Your rate may not necessarily be the best if you choose this option. It’s always best to shop and compare different offers because you may find something better than your current rate. Even if you avoid a prepayment penalty, there may be other fees such as the CMHC premium.

Another drawback is that in order to benefit from the transfer, you have to sell your old house and buy the new one at the same time, which is not easy to coordinate. This option doesn’t offer much flexibility and is not offered by all lenders.

	Tips and tricks If you’re buying a new home before you can sell your old one, a bridge loan allows you to utilize your current home’s equity as a down payment. Does your lender offer bridge financing ?

Steps to follow when transferring a mortgage

Here is a brief overview of how to transfer a mortgage:

1. Assess the financing needed for your new property.

2. Check the terms of your current loan and contact your lender to discuss your situation. Do the terms allow you to port your mortgage? Does the interest rate work for you?

3. Compare other available options. Which option will benefit you most? Should you break the mortgage, transfer it or find a new lender?

Calculate the penalty and compare it with a new rate, so you can decide on the best option for you.

3.1. If you choose to switch lenders, you’ll need the following documents:

A copy of the mortgage renewal letter from your current lender
The municipal property tax certificate
A proof of property insurance
A proof of income with a letter of employment and pay stubs

3.2. If you choose a mortgage transfer, you must apply to your financial institution and follow the same procedure as when you applied for the initial loan.

Remember that transferring a mortgage requires that you sell your old home at the same time as purchasing your new one. Be sure to consult professionals who can offer guidance.

4. When your application is approved, read your mortgage contract carefully to make sure you understand your responsibilities and the terms and conditions.

5. Regardless of the option you choose, if you’re selling your old home and buying a new one, you will need a notary. To prepare for the meeting, have these documents ready:

Title deeds
Updated certificate of location
The municipal property tax certificate
The civil status certificates for each of the parties

What are the mortgage options when selling a property?

When selling your home, there are several available mortgage options. You can transfer your mortgage or have it assumed or break the contract. What are the differences?

Transferring, taking over or breaking a mortgage
	Transferring a mortgage	Having your mortgage assumed	Breaking a mortgage
Definition	The same mortgage contract is kept and transferred to a new property.	A buyer takes over the current mortgage loan on a property.	A mortgage contract is broken before the end of its term.
Example scenario	You’re selling your home and buying a new one at the same time.	The buyer of your home assumes your mortgage.	You want to break your mortgage contract to switch lenders (subrogation) or for another reason.
Things to consider	Transferring is generally not permitted if you have a variable rate mortgage whereas a fixed rate mortgage may be transferred.	The buyer benefits from the interest rate that the seller negotiated at the time of the initial loan. The seller remains responsible for the loan.	In addition to a prepayment penalty, there are costs for breaking your mortgage such as administration fees, appraisal fees, etc.

In conclusion

A mortgage transfer may be a good option depending on your situation. It’s up to you to determine what’s best. Make sure to consult real estate professionals to ensure everything goes smoothly. Find a real estate broker who can support and guide you through the adventure of home ownership.

Frequently asked questions

1. Can I avoid a prepayment penalty by transferring a mortgage?

Porting your mortgage usually avoids a prepayment penalty unless the new home is cheaper. However, this does not mean that there are no costs associated with the transfer. There may be administrative, legal or appraisal fees. The best way to learn and make an informed decision is to contact your financial institution.

2. Is there a credit check involved in transferring a mortgage?

When you choose to transfer your mortgage, you must go through the same steps you followed when you applied for the initial loan. A credit check is part of the process.

3. Does the interest rate stay the same when you transfer a mortgage?

If the value of the new loan is the same, absolutely! Transferring your mortgage is a great option because you keep the same conditions as your initial loan. It’s best to shop around, as sometimes there’s a better deal to be found!