Transferring Your Mortgage

Life is constantly changing, from your career to your family, as we climb up the ladder of life. With these life changes, your current home may no longer be working for you.

If you’re feeling cramped in your tiny apartment or have a little one on the way, it may be time to consider moving on up! For those of you who feel that your current home is too big, or requires too much maintenance, then now might be a good time to scale down!

Regardless of the reason you are looking to move from your current digs, there are some things to consider, such as your current mortgage and potential costs of moving.

If your mortgage is portable, moving up and scaling down will be much simpler. If you are unsure of the term, “porting” your mortgage refers to taking your existing mortgage (including your rates and terms) and transferring it from the original property to another. This can only be done if you’re purchasing a new property at the same time you’re selling your old one. However, unlike mortgage refinancing, porting does not require you to break your mortgage or pay penalties.
Whenever you break your mortgage, there are penalties associated with that as it is a contract. Depending on the type of mortgage you have (variable vs. fixed-rate) and how much time is left (1-year, 2-years, etc.) will determine the level of penalty. Typically, these are calculated in one of two ways:
Interest Rate Differential:
In Canada there is no one-size-fits-all rule for how the Interest Rate Differential (IRD) is calculated and it can vary greatly from lender to lender. This is due to the various comparison rates that are used. However, typically the IRD is based on the following:
- The amount remaining on the loan
- The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today
Ideally, you will want to be aware of what your IRD penalty would be before you decide to break your mortgage as it is not always the most viable option.
Three Months Interest:
In some cases, the penalty for breaking your mortgage is simply equivalent to three months of interest.A variable-rate mortgage is typically accompanied this penalty.
If you are unable to port your mortgage, you would need to re-qualify for a new mortgage at the current rates offered by lenders and would be subject to government changes – including recent “stress test” rules.
If it has been a while since you bought your first home, you may be unfamiliar with the “stress test”. If you are purchasing a new home, with a new mortgage, it is important to understand what this test is as it is a requirement to qualify.
The Stress Test was originally introduced in October 2016 for insured mortgages (down payments of less than 20%), but as of January 1, 2018 this now includes all mortgages, regardless of down payment percentage. This test determines whether a home buyer can afford their principal and interest payments, should interest rates increase. It is based on the 5-year benchmark rate from Bank of Canada or the customer’s mortgage interest rate plus 2% – whichever is higher.