When you switch homes, you may want to bring your mortgage. This process is known as porting, which allows you to keep the same mortgage terms with your existing lender. People choose to port their mortgage if their existing interest rate is lower than the current rate in the market. This allows them to keep their lower interest rate instead of switching to a higher interest rate mortgage.
Most lenders enable porting and automatically include it in your mortgage agreement. However, there are times when porting isn't allowed, and you'll potentially lose your low interest rate mortgage. Continue reading to become an expert on mortgage porting in five minutes or less.
Now that you understand what porting a mortgage is and when you may need it, the next step is to determine if you're eligible to port your mortgage. As mentioned previously, most mortgage lenders will automatically include a porting clause in your contract. However, it won't be easy to change if your agreement doesn't have a porting feature. You will most likely need to pay mortgage-breaking penalties when you transfer homes or find another porting alternative. If you are a first-time home buyer and don't already have a mortgage, make sure your contract includes a portability future.
If you can't port your mortgage, don't worry! A few alternatives can help you keep your low interest rate and monthly payment.
Additionally, most variable-rate mortgages in Canada don't allow you to port. You'll need to switch to a fixed rate in advance or choose an alternative from the list above. However, in a market where interest rates are expected to rise (such as now), it's recommended to have a fixed-rate mortgage anyway. This allows you to reduce the amount of interest you pay over the amortization of your mortgage. There are some other scenarios that impact the mortgage portion process; such as upsizing or downsizing your home.
In most cases, you switch homes to move into a larger/ more expensive one. Maybe you've started a family and need more space, or you're just at a different point in your career. Whatever the reason, if you're upsizing your home, you will likely need to increase your mortgage amount.
The simplest and cheapest way to increase your mortgage is to apply for a second mortgage. This won't change the initial mortgage contract, and you'll just have an additional lender to make monthly mortgage payments to. This is known as a blended mortgage because your interest rate and payments are blended between the two mortgages. When getting a second mortgage, be sure to understand the interest rate of your new mortgage and how it will affect your average rate. Most likely, the second rate will be higher.
If you have lived in your home for a few years and have sufficient home equity, you will not need to contribute extra for a down payment if moving into a larger home. However, if you don't have enough home equity to cover the down payment, you'll need to pay more out of your savings. This only applies if you are moving into a more expensive home. You'll never need to pay an additional down payment if porting to a less expensive home. The following paragraph will calculate a hypothetical situation of moving into an $800,000 home after living in a $500,000 apartment for years.
At this point, understand that you have $171,000 in savings locked up into your apartment. This is due to paying off your mortgage balance and market increases to the price of your apartment. This is not quite the $300,000 difference in your new home, so you'll need a second mortgage. You will need to make sure the additional mortgage payments do not increase your debt service ratios too much. As a result, you'll likely need to contribute a good chunk of the $171,000 to your new home to keep your mortgage payments smaller. Each situation is different, so it's best to talk with your mortgage lender.
Another scenario is selling your home to move into a less expensive home. Maybe your children have moved out, or you just want to simplify your life. This gives you the option of paying off a remaining chunk of your mortgage, having extra money in your savings account, or a combination of both. By selling a more expensive home and buying a less expensive home, you're able to unlock home equity and have some extra money not tied up in your home.
If you choose to use this money to pay off your mortgage, there is only a certain amount you can pre-pay. In most cases, lenders will only allow you to pre-pay 20%-25% of the mortgage balance each year. This means if your remaining mortgage balance is $100,000, you can only make a maximum additional contribution of $25,000. Anything more than this will be subject to pre-payment penalties.
Now that you know all there is to know about porting, it's time to start the process! If you're interested in porting your mortgage, the first step is talking to your current lender or mortgage broker in Canada. They will be able to tell you everything you need to know about porting with them and what the process looks like.
However, if you're upsizing and need a second mortgage, you'll need to follow the standard steps for qualifying for a mortgage in Canada. This includes things such as:
Once you have all the necessary paperwork, you'll be able to sign a second mortgage contract. This will finalize the process, and you'll be all set!
Aside from the general things to keep in mind with porting, there are a few other things you should consider. One is mortgage life insurance. If you currently have this type of insurance, it's important to know that it doesn't transfer with your mortgage. This means you'll have to reapply for coverage with your new lender if you want to keep it.
Next, as is the case with mortgage pre-approvals, your porting is usually only valid for 30- 130 days. This means you must finalize your home sale and receive ownership of the next house before this period is over. Most banks offer a period of 130 days. However, always double-check with your lender.
Finally, also consider the type of mortgage you have. As mentioned previously, you can port fixed-rate mortgages in Canada without penalties. On the other hand, if you have a variable rate mortgage, they may not be as easily portable. This is because some lenders have different rates for new customers. As a result, you may end up paying a higher interest rate if you port your variable rate mortgage.
Ideally, you qualify for the porting before beginning to shop for homes. This is because most real estate agents want to see you have proof of financing before spending time showing you homes. Keep in mind real estate agents don't get paid until your home buying transaction finalizes.
Porting your mortgage is a great way to save money and simplify the home buying process. Always try to negotiate a mortgage contract with a portability feature, this allows you to save fees and time if you ever want to move in the future. If you are new to buying a home, always make sure your mortgage has portability. By understanding how porting works and what to consider, you can make the best decision for yourself and your family.