The Portable Mortgage -- You Can Take It With You
For more than two years we've seen the best mortgage rates ever, and many experts believe the low-interest trend will continue into 2014.
If you're planning on taking out a mortgage especially if there's a chance that you'll be buying again during the life of the mortgage go portable.
A portable mortgage gives you the option to take your existing mortgage to another property. So even if mortgage rates have risen by the time you move on, you'll still be paying today's low mortgage rate on your next home. On top of that, you avoid any prepayment penalty when you sell your current home.
Maybe you expect to be transferred for your job, or you plan to fix up one home then move on to another, or you're building equity with a condo so you can buy a house when the babies are a few years older...
Things change, but a portable mortgage doesn't have to change with them.
Jenny and Kai qualified for a five-year fixed-rate mortgage of $350,000 at 2.99 per cent on their first home, a small condo. Three years down the road they're making more money so they decide to buy a townhouse with a rental suite. Their new home will require a mortgage of $500,000. Interest rates have climbed, so the best mortgage rate they could get now would be 4.3 per cent. However, they have two years left on their current mortgage, and they had the foresight to get a portable mortgage. They'll be able to blend their current mortgage with new funds of $150,000 at the 2.99 per cent rate they're paying now. This will save them about $9,100.
Generally, the lender will take the new money ($150,000) at the current 2-year interest rate because that is the term remaining on the original mortgage.
The process is not completely seamless, though. When a mortgage is "ported," the lender treats it as a brand-new mortgage application. That means:
- The clients have to re-qualify (i.e., credit, income, etc. will be looked at)
- The new property will have to satisfy lender guidelines (this can be an issue if the clients are moving to an area that lender does not lend in)
- The clients will be re-registering a brand new-mortgage so all applicable fees will apply (e.g., closing costs including legal, property purchase transfer tax, etc.)
A portable mortgage gives you the option, but that doesn't mean you have to use it.
You want to "port" your mortgage if:
- You have a good mortgage rate with a number of years remaining on your term and/or
- You want to avoid paying a prepayment penalty on your existing mortgage
You're better off getting a new mortgage if:
- You want to take a product that is not offered by your current lender
- You qualify for mortgage terms that are much better than the porting mortgage (but remember to account for the prepayment penalty)
Questions to ask about the mortgage
- Is the mortgage portable? Although most mortgages are portable in some form, there are some mortgages out there that are not.
- What is the allowable time lapse between completion dates (completion of sale of current home and completion of purchase for new home)? Each lender has its own rules on how much time you have between completion dates. Some lenders want completion dates to be the same while others might allow up to three months.
- Does the lender allow new funds? Some lenders will only allow the identical mortgage amount to be ported (i.e., you can't increase the amount of the mortgage.) Other lenders will allow blending.
- If blending is allowed, what will the new rate be? Each lender has its own formula for blending rates. For example, Kai and Jenny are paying a discounted rate of 2.99 per cent, but they had to qualify at the posted rate of 5.14 per cent. Some lenders will use the same discount on new funds while other lenders will use only posted rate on new funds.
- Does the lender allow the application to change? For example, a client may sell a home and repurchase a new home with a spouse. Would the lender allow the new applicants to join the application?
- Is term length of the mortgage allowed to change? For example, if the current mortgage has two years remaining, can the client extend the mortgage to a term longer than two years?
Your independent mortgage broker can guide you through the multitudes of decisions and find the best combination of mortgage rates and features for where you are now and where you might be before the mortgage term is up.
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