When you sell your home and buy a new one, you may need to break your mortgage. But this can come with added costs in the form of early prepayment penalties. The good news is that you may be able to avoid these additional fees by porting your mortgage.
Key Points
- Porting a mortgage involves transferring your current mortgage to a new home when you move.
- Porting your mortgage may be a way to avoid early prepayment penalty fees your lender may charge for breaking your mortgage early.
- You’ll need to qualify to have your mortgage ported, as not all mortgages are portable.
What Does Porting A Mortgage Mean?
Porting your mortgage means moving your current mortgage from your existing home to your new home without any penalty fees. Your mortgage term and interest rate remain unchanged when you port your mortgage. Porting a mortgage is often easier and less expensive than going through a new mortgage application and approval procedure over again.
However, if your new home is more expensive than what you presently owe, you’ll need to re-qualify for a home loan. That means you’ll have to go through the entire loan process again, including having your credit score checked, your income and debt assessed, and undergoing the mortgage stress test.
Pros Of Porting A Mortgage
Consider the following benefits of porting your mortgage before choosing this route.
Avoid Prepayment Penalty Fees
One of the biggest perks of porting a mortgage is it helps you avoid the penalty fees that your lender may charge for breaking your mortgage early (for the ported amount). This can save you thousands of dollars, as the contract-breaking penalty is typically the greater of the following:
- Up to 3 months’ worth of loan and interest payments (depending on their lender’s specifications)
- The interest rate differential (IRD), which is the difference between your original mortgage rate and the rate your lender can charge today on the funds for the remaining mortgage term.
Keep Your Rate Low
If the rate you’re currently paying on your mortgage is lower than today’s rate, porting your mortgage can translate into savings on interest payments over the mortgage term.
If you don’t port your mortgage, you’ll need to re-qualify with a new lender and negotiate a whole new contract for your new home. Depending on the current market rates and your finances, you could end up being stuck with a much higher rate than you were paying before.
Simplify The Mortgage Process
Shopping around for a mortgage and negotiating a contract can be stressful and time-consuming. If you’re happy with your current arrangement, simply transferring your mortgage from your old home to your new one can take one less task off your plate.
Cons Of Porting A Mortgage
Consider the following drawbacks of porting your mortgage before choosing this route.
Lining Up Both Transactions
Lenders often only allow 30 to 120 days for you to finish porting. While 120 days would ideally be enough time to sell your house and transfer to a new one, 30 days might not be enough time at all, depending on how easy it would be to get your house sold. As such, you may need to line up the sale of your current home with the purchase of a new home to make this work.
Not Available With Every Lender
Some lenders may offer portable mortgages, but many others do not. If your current lender doesn’t give you this option, you may have to switch lenders.
No Option To Shop Around
You may not be able to compare lenders and look for lower interest rates when you port your mortgage. Since you’re taking your current interest rate with you, you can’t take advantage of a lower rate if it’s available, unless you break your mortgage.
Can You Port A Mortgage For A More Expensive House?
If you buy a home that’s more expensive than your current home, you can still port your mortgage. This is possible through what’s referred to as a “blend and extend” and “port and increase”.
Blend and extend. In this scenario, you would increase your loan amount and extend your term. You would also take the average of your current mortgage amount and interest rate, and the new loan amount at a new interest rate.
For instance, let’s say you currently have a 5-year fixed-rate mortgage with 3 years remaining and a rate of 4.0%. Now, you’re looking to port your mortgage, but rates are a bit higher at 6.0%. With a blend and extend feature, your rate would be somewhere between these two rates. In this case, let’s say the blended rate is now around 5.0%. Your loan term would be extended by 2 years to revert to a 5-year term.
Port and increase. If you’re buying a home that’s worth more than your existing home, you could port your current mortgage at its current rate to the new home. If you need more money to finance the more expensive home purchase, the principal amount of the loan on the new property is more than the outstanding balance of the original mortgage.
What Happens If You Want To Port Your Mortgage To A Less Expensive House?
If you want to port your mortgage to a less expensive property, your lender may charge you a prepayment penalty on the difference between your old and new loan amounts. Before porting your mortgage in this situation, find out if a prepayment penalty will be charged, and if so, how much this fee would be.
If your current mortgage has prepayment privileges, you may be able to reduce your mortgage without penalty. Otherwise, you may consider making a smaller down payment on your new home (if your lender allows it) to reduce the amount you would have to prepay.
Are You Eligible To Port Your Mortgage?
Before your mortgage can be ported, you’ll have to make sure that it actually qualifies for portability. Here are some factors that determine your eligibility for porting your mortgage:
You Have The Option To Port
Before you signed the mortgage contract that you have now, your lender should have mentioned the option of porting it. If the contract doesn’t include a portability feature, you won’t be able to renegotiate for one, if you ever decide to move.
While the majority of lenders automatically feature the portability option in all their mortgage contracts, it’s good to ask about it, just in case.
Interest Rate
Variable and restricted mortgages are often not portable. If you have a variable mortgage, you would first have to switch to a fixed rate before you would qualify for portability.
Do You Need A Down Payment When Porting A Mortgage?
Yes, a down payment is still required when porting a mortgage. You’ll still need to follow the standard rules of taking out a mortgage, even when porting.
That means if the mortgage on your new home exceeds 80% of its value, you’ll likely have to pay mortgage default insurance premiums.
Do You Have To Pay CMHC Insurance When Porting A Mortgage?
Yes, as mentioned, if your LTV ratio is over 80%, you’ll have to pay CMHC fees. However, if your mortgage is currently insured, you may be able to reduce or even eliminate your mortgage default insurance premiums when you port your mortgage.
All three of Canada’s major mortgage default insurance providers offer a portability feature that allows borrowers to save on these costs:
Canada Mortgage and Housing Corporation (CMHC)
With CMHC’s portability feature, you can reduce or eliminate your insurance premiums when you sell your current home and buy a new one. The program works through premium discounts.
The discount amount you qualify for is based on the elapsed time between your initial closing date and your new mortgage default insurance application. Discounts can range from 25% to 100% premium credits.
Sagen MI Canada
Sagen allows borrowers to save on the costs of a new mortgage through its portability feature. When you buy a new home and sell your current home, you can port your Sagen mortgage default insurance policy to your new home. You may do this for up to 6 months following the closing date of your current mortgage.
The insurer also offers its Sagen Energy-Efficient Housing Program, which allows homebuyers who purchase an energy-efficient home to take advantage of premium refunds of up to 25% of the Sagen mortgage insurance premium.
Canada Guaranty
Current Canada Guaranty-insured borrowers may qualify for a premium credit through the insurer’s Borrower Loyalty Credit program. A credit of anywhere from 25% to 100% may be applied to the premium paid on the original mortgage within 6 to 24 months from the original closing date.
Can I Transfer My Mortgage to Another Bank?
Transferring your mortgage to another financial institution is not the same as porting your mortgage. In the case of the latter, you’re simply moving your mortgage from one property to another. However, when moving your mortgage to another lender, you’ll need an entirely new mortgage.
You can only port your mortgage with the same lender. If you want to port your current mortgage to another property, you can, but this must be done with the same bank.
But if you want to switch lenders, you’ll need to start the mortgage process over. That includes qualifying for a mortgage, undergoing the mortgage stress test, and pay a mortgage penalty.
An Alternative To Porting
An alternative to porting your mortgage that may be more appealing involves signing your mortgage over to the person buying your current home. This is known as an “assumable mortgage”.
This may work best if your current mortgage comes with a favourable interest rate. This way, the buyer may be more inclined to take over your mortgage. However, this is only possible if the lender approves of it.
Keep in mind that there are some risks to an assumable mortgage. Most notably, you may still be on the hook for the mortgage repayment if the new owner defaults.
Most banks will accept this alternative, because not only will the terms of the initial mortgage contract still be met, but they could also be gaining a new client in the process. You can then be freed from your mortgage contract without having to pay an early prepayment penalty fee.
Is Porting Your Mortgage The Right Decision?
All in all, porting a mortgage is not always the right decision for every homeowner. If you’re content with your current mortgage and want to avoid prepayment penalties, porting might be worth considering. But if you don’t think you can swing lining up the sale of your current home with the purchase of a new one or want to take advantage of lower rates, porting might be such a good idea. If you’re thinking about porting your mortgage or are trying to find out if it’s even an option for you, discuss the situation with your lender before you start the selling and moving process.
