One way to avoid harsh penalties is to register your mortgage as a portable mortgage.
According to the Globe and Mail (2013) 70% of people break their 5-year term mortgage.
It is our job as your mortgage broker to set up your mortgage so you don’t have to break your mortgage and pay penalties, or, if you must break your mortgage, these penalties are minimized.
What is a portable mortgage?
A portable mortgage is a mortgage that is transferred from one house to another. When you buy a new house before your current mortgage terms are up, it can be cost-effective to move your mortgage, instead of breaking your current one and applying for another.
There are conditions to “porting” a mortgage. The people on title must be the same and the amount for your new house must be considered.
If the amount of the mortgage you need to buy a new house is not the same as the current mortgage you have (Very common if you are upgrading/downgrading), there are a few options:
You need to borrow more money to buy your new house. This means you need to add on to your old mortgage.
The terms of the old contract stay the same, for the original amount. The extra money you need to buy your upgraded house is dealt with as a separate contract. This is dealt with as a ‘new mortgage’, and you would have to re-negotiate your rates and terms.
Most lenders will “blend” the two rates together to make the new mortgage simpler to understand.
Your new house is less expensive than your current one, so you don’t need to borrow as much money as you currently are.
If your new mortgage is 1-20% less than the old one, it would be best to make a pre-payment on the old mortgage before porting it over, because you would not be charged penalties.
If the difference is more than the pre-payment amount, the lender will charge you a penalty on anything over the pre-payment amount. Ex: your current mortgage is $100,000. The new house you are buying is $75,000. Your current mortgage has a 20% pre-payment agreement. You can pay the $25,000 difference back and you will only be penalized on the $5,000.
In this situation, it would probably be worth either a) breaking your mortgage and getting a new one or b) negotiating with your lender so they keep you a customer.
You transfer the mortgage you have to your new home. There are usually no penalties for this, if this option has been added into your mortgage before you signed it.
Porting a mortgage only makes sense if your current rate is lower than the one being offered OR if your penalty for breaking your mortgage is very large. If interest rates have gone up, porting a mortgage would lock in your old rate, instead of having to get a new mortgage at the higher rate.
If interest rates have gone down since you applied for your current mortgage, it might be worth breaking your mortgage, paying the penalty, and starting a new mortgage for your new house.
How to apply for a portable mortgage
The person applying for the mortgage would need to read the fine print to see if it is available. Most quality lenders offer this option, but some might remove it when they have given a big discount to the rate.
Call/text us today to ask about starting the mortgage process!
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