Porting or Transferring Your Mortgage in CanadaJuly 26, 2023
The real estate market in Canada is extremely vibrant at present, with a lot of homeowners taking advantage of the low interest rate to move up the property ladder sooner than they may have done in the past.
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But the normal mortgage term in Canada is 5 years, with hefty penalties for breaking the mortgage or prepaying it early.
The cost of breaking or prepaying your existing mortgage part way through its term is one that’s easy to overlook when you’re focused on buying your next dream home, but it could be one of the biggest costs in the whole transaction. For this reason, some people choose to port their mortgage. This means transferring your existing payments to the next property.
Can you transfer a mortgage to another house?
Fortunately, most mortgage lenders in Canada offer the option of porting a mortgage to a new property. This is effectively the process of transferring your existing mortgage on your current home to the new property and retaining the same terms you negotiated at the start.
So, we’ll take a look at how porting a mortgage works in Canada and answer some of the most common questions people have.
Why Would You Port a Mortgage?
There are 2 obvious reasons it might be better to port a mortgage:
1. To avoid paying a penalty for breaking your existing mortgage.
We’ve already mentioned that the typical term of a mortgage in Canada is 5 years. And almost all lenders charge a prepayment penalty if you break the mortgage mid-term.
This will normally amount to thousands of dollars, but the Financial Consumer Agency of Canada has a useful breakdown of how this might be calculated.
In addition to the prepayment penalty there will probably be other administration charges for breaking the mortgage early.
2. To carry on benefiting from a competitive fixed rate.
Mortgage rates have been at an all-time low for several years, partly because of the credit crunch of 2008 and more recently due to Covid-19 and efforts by world governments to stimulate the economy.
However, with inflation rates rising we are seeing small increases in central bank interest rates in many major economies. This will start finding its way to mortgage rates very quickly, so, if you can port a competitive mortgage and enjoy the lower rate for a few years, there could be a definite benefit in porting rather than taking out a new mortgage.
How to Port a Mortgage – The Practicalities
It makes good sense to check your mortgage options before even starting the process of looking for a new home. That way you’ll avoid any expensive surprises further down the line.
The first thing to check is whether your existing mortgage is portable. Most, but not all, lenders in Canada offer the option. But it is very common to find that variable rate mortgages are not portable unless you switch to a fixed rate first (which may involve arrangement fees).
Is Porting a Mortgage More Expensive?
If your mortgage is portable, then you need to check whether it’s going to be beneficial to port it. If you’re currently locked into a fixed rate that is higher than the rate you might be able to negotiate now on a new mortgage, then it might not be worthwhile.
However, even if the new rate available is less than your current rate, it might still be better to port your existing mortgage rather than pay penalties to break it.
Your mortgage lender will tell you what the penalties are but a good example of how to make this calculation can be found on the Financial Consumer Agency of Canada site.
In the current climate of rising interest rates, it’s more likely that a new fixed rate will be higher than the rate on your existing mortgage contract, which makes the argument stronger for porting.
However, other factors might make a new mortgage more favorable, such as an improvement in your financial situation, your credit score, or the amount you have as a down payment. All these factors might mean you should ask “is it better to port a mortgage or apply for a new one?”.
We would always recommend that you use a comparison site and mortgage broker to check what is now available to you.
Porting a Mortgage to a Higher Value Property
Unless you’re downsizing it’s very likely that your new house will be more expensive than your current one. This isn’t a problem, but if you require a top-up to the mortgage then you need to check whether your existing lender will allow you to “Blend and Extend”.
Under this option, you are porting the existing mortgage to the new property but increasing the amount you borrow. At the same time, you will normally extend the length of the mortgage to a new fixed term, typically 5 years.
The interest rate you pay will be a combination of the fixed rate you had on the existing mortgage, and the new interest rate on the additional amount over the new term. This is known as the “blended” rate.
If your new fixed rate is higher or lower, then the blended rate will be somewhere between the existing ported mortgage rate and the new rate.
So, for example:
Let’s assume you currently owe $300,000 at a fixed rate of 2%, and you now need to borrow a total of $400,000.
If the new rate being offered is 3%, then your blended rate will be somewhere between 2% and 3% on the entire $400,000 for the new term. This would be cheaper than paying 3% on the entire balance with a new mortgage.
If the new rate being offered is 2% and you’re currently fixed at 3%, the saving by taking out a new mortgage could amount to $20,000 over 5 years.
Let’s assume the penalty for breaking the mortgage is $12,000 and the blended rate if you port the mortgage is 2.5%. If you port the mortgage, you will pay $10,000 more interest over 5 years but still be $2000 better off by porting because you won’t pay the penalty.
This is where you should definitely enlist the help of a mortgage broker who can calculate these figures for you and also offer you alternatives.
Porting a Mortgage to a Lower Value Property
If you’re intending to downsize and won’t need the entire existing mortgage this isn’t a problem. However, it’s likely that you’ll have a prepayment penalty to pay on the amount by which you reduce the mortgage.
It’s worth checking whether your existing mortgage has “prepayment privileges” which allow you to reduce the mortgage, in certain circumstances, without a penalty.
It’s even worth considering making a smaller down payment on the new property if it means you don’t have to prepay as much, or any, of the existing mortgage and thereby save paying a penalty.
This of course assumes the lender is happy with the lower down payment. But you could use the money saved to pay down the capital over a period of time, or at a later date when there’s no penalty.
Do You Need a Down Payment When Porting a Mortgage?
Yes, you do. The normal rules for mortgage borrowing still apply, so if the mortgage on the new property is more than 80% of its value there may be mortgage default premium to pay.
Do You Need to Qualify When Porting a Mortgage?
Your existing lender will normally carry out similar financial checks as when you applied for the original mortgage, although this will normally be quicker than taking out a new mortgage as they already hold a lot of your information.
If you have a clean history of repaying on time it would be unusual for them to refuse to port the mortgage.
However, if your situation has worsened it is possible they will turn you down or refuse to advance additional lending.
Is Porting a Mortgage Easier than Taking Out a New Mortgage?
Generally speaking, it should be. However, timing can be an issue as most lenders require you to close the purchase of the new property within 30 to 120 days of closing the sale of your existing property. Check with your lender what their time-limit is.
They will still require all the normal valuations on the new property and will have to meet their criteria, so the ability to port isn’t guaranteed.
Is Transferring a Mortgage to Another Bank an Option?
Porting a mortgage means transferring the security from one property to another. But if you move to another lender, you would be taking out a completely new mortgage, and this is completely different to porting a mortgage. So, the short answer is “no”.
Porting is something that can only happen with the same bank. For example, both Royal Bank and Scotiabank offer porting but it has to be with their bank. In order to figure out if porting makes sense for you, then it’s best to speak to an advisor.
What About Another Person?
In some cases you can and in some you can’t. Whether you can or not depends on the terms of your mortgage. It has to say in your terms that the mortgage is assumable to be able to do so.
The Bottom Line
For most people, buying a home is the biggest financial decision they will make, and it’s vital to be armed with full knowledge on all the costs that will be involved and to be completely prepared before you even start the search for your next property.
Having the flexibility to port a mortgage to a new property can be a great option and you should always consider whether it is right for you.
However, there are several factors that can affect the decision and a professional mortgage broker can guide you, confirm all the options available and the cost implications of each, and carry out the negotiations on your behalf.
Most mortgage brokers are paid a commission from the lender they introduce you to, so there will not normally be any upfront cost involved and, ultimately, should save you a considerable amount of money by ensuring you get the best deal possible.