Is your mortgage term coming to an end? Are you happy with the terms of your loan? Or perhaps you’ve just bought a home and need to move? These are just few situations that may lead to a mortgage transfer.
What exactly is a mortgage transfer? How does it work? What are the benefits? Can you switch mortgages at any time? Find the answer to all your questions.
The 3 types of mortgage transfers
Mortgage transfers often lead to confusion, as they refer to three distinct concepts:
- Subrogation: transferring the mortgage from one lender to another.
- Porting: transferring the existing mortgage to a new property.
- Assumption: transferring the mortgage to the new buyer of the property.
Before we dive into each of these options, here’s a brief overview of each:
|
| Portage |
| |
| What is it? | Transfer of the mortgage from one lender to another. | Transfer of the mortgage to a new property. | Transfer of the mortgage to the new buyer of the house. |
| When to use it? | You are dissatisfied with your current terms or lender. | You are selling and buying a house simultaneously, and your interest rate is lower than the current rates. | You want to avoid penalty fees and offer favorable terms to the buyer. |
| What to consider? | May be more difficult for a subordinated or collateral mortgage. | Often impossible for a variable-rate mortgage. | The seller may remain responsible for the loan. |
1. Subrogation: transferring your mortgage to another lender
Mortgage subrogation involves changing lenders, typically to improve your repayment terms without altering the loan amount. This transfer generally takes place when you renew your term.
In Quebec, most mortgages have a five-year term, meaning every five years, you have the option to either renew your loan with your current lender or switch to a different financial institution. This is an ideal time to compare various offers to ensure you get the best repayments terms possible.
Why change lenders?
Transferring your mortgage to a new lender can offer several benefits, including:
- Securing a lower interest rate.
- Changing your payment frequency.
- Improving your early repayment terms.
Are you satisfied with your current terms? Could you get a better interest rate? Is there another bank offering more flexibility? These are just a few questions to ask yourself when shopping around.
Remember: You are not obligated to stay with your current lender. It's in your best interest to compare options and explore what’s available!
How to transfer a mortgage from one bank to another
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Compare other offers: Assess whether these offers are more appealing than the terms your current lender is offering. Start shopping early to give yourself plenty of time to find the best deal.
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Submit an official request: The new lender will evaluate your application based on various factors, such as your creditworthiness, credit report, and income. Once approved, you can negotiate your terms.
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Obtain a payment statement: This document outlines your mortgage balance, renewal date, and any other relevant details. You will need to provide this to your new lender.
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Pay the fees associated with transferring your mortgage: These fees can vary depending on your specific situation.
Required documentation and conditions to switch lenders
To successfully switch your mortgage lender, certain criteria must be met, and specific documents must be provided. Even if you have already purchased your home, transferring from one lender to another is treated like a new purchase.
This means you will need to qualify with the new financial institution. Before approving your application, the institution will assess various aspects of your finances, including your credit report.
You will also need to provide several documents, including, but not limited to:
- A copy of your current lender's mortgage renewal letter.
- Proof of income from your employment.
- A property ownership and insurance certificate.
- A property tax statement.
It is important to note that the criteria and documents required by the new lender may differ from those of your original lender.
Fees and cost when transferring
While transferring your mortgage from one lender to another can provide significant benefits, it also comes with certain fees.
In some cases, the costs associated with the transfer may exceed the expected savings. Therefore, it's essential to carefully weigh the pros and cons of your decision before proceeding with the transfer.
The fees will vary depending on your situation and financial institution. However, here are some examples of fees you might need to pay:
- Transfer fees: These cover the costs of transferring the mortgage from one bank to another.
- File opening fees: These cover the registration of the new mortgage.
- Release fees: These cover the discharge and cancellation of the current mortgage agreement. These fees are usually outlined in your contract.
- Appraisal fees: These fees cover the cost of confirming the value of your property.
- Legal fees and costs: These cover the drafting and signing of legal documents.
How to avoid paying a mortgage penalty
It’s important to note that some lenders may cover or waive part of all the fees to encourage homeowners to transfer their mortgage. Be sure to discuss this with your bank to understand their policy on the matter.
A tip for a less expensive transfer: Wait until your loan term is almost over. Transferring your mortgage before the term ends could result in costly prepayment penalty fees, which might cancel out any potential savings.
2. Porting: transferring your mortgage to a new home
In addition to switching lenders, a mortgage transfer also refers to moving your mortgage to a new home. This option is known as mortgage porting.
Porting involves transferring the terms of your current mortgage to the new property you purchase. These terms include:
- The mortgage balance.
- The interest rate.
- The amortization period.
- Payment conditions.
These terms remain the same and applied to the new home. This type of transfer can be beneficial when your current financing conditions are better than those you would get by signing a new contract.
Can I transfer my mortgage to another home?
It’s important to ask yourself this question, as not all lenders offer this opportunity, and not all mortgages are transferable. To make this change, your mortgage agreement must specifically allow for a transfer. Most variable-rate mortgages are not transferable.
Additionally, it’s important to note that the time window for porting is very short. Most lenders who allow porting offer a period of 30 to 120 days to complete the transfer, a limited period that could jeopardize your project.
Finally, this type of change may also involve fees. Be sure to check with your lender or broker to understand the terms that apply to your situation.
What happens when the new property is not the same price?
In reality, it is unlikely that the new property you wish to purchase and transfer your mortgage will cost exactly the same as your current loan. You will likely need to make some adjustments to align your mortgage with the new situation.
If the new property is more expensive than the current mortgage, you may consider one of the following options:
- Hybrid mortgage: a mixed loan allows you to have two distinct mortgage portions. The first portion retains its original interest rate for the remaining terms, while the second potion cover the additional financing needs based on the terms, rate, and conditions negotiated with your lender.
- Weighted interest rate mortgage: your financial institution might offer you a weighted interest rate, which is a rate between your current mortgage rate and today's rate. The length of your term might also be adjusted.
3. Assumption: transferring your mortgage to the buyer of your home
In some cases, it may be possible to transfer your mortgage through an assumption agreement, also known as a mortgage assumption.
This type of transfer involves passing your mortgage on to the new buyer of your property. The buyer will need to pay you the difference between the sale price and the assumed mortgage balance.
Some financial institutions accept mortgage assumption by a new buyer, but not under all circumstances. The buyer will need to qualify for the loan, just as they would for a standard mortgage. Additionally, not all types of loans are transferable in this manner.
Advantages and disadvantages of mortgage assumption
Mortgage assumption can be attractive to the buyer if they receive better terms by assuming your mortgage rather than taking out a new loan. This is especially true when current interest rates are higher than the rate on your existing contract.
For you, this transfer allows you to relieve yourself of the mortgage while avoiding prepayment penalties or expensive fees.
However, this decision also comes with some disadvantages that you should be aware of before proceeding. For instance, you could remain responsible for the loan even after the transfer. Be sure to consult with your broker or bank for more details.
In the case of a separation
When a couple separates or divorces, the family home often becomes a major financial concern. One potential solution is mortgage assumption, where one spouse agrees to take over the existing mortgage if they wish to keep the property. The spouse retaining the home must not only assume the mortgage but also typically buy out the other spouse’s share.
This process requires the spouse assuming the mortgage to qualify with the lender again, demonstrating their ability to manage the financial responsibility on their own. It allows the current loan terms to remain intact, avoiding the need to close the mortgage prematurely and incur any penalties.
Can you transfer your mortgage before the end of your term?
It is possible to transfer a mortgage before the end of the term, but it usually comes with a cost. Lenders typically impose prepayment penalties if you choose to transfer your mortgage early. These fees can be quite substantial, depending on your situation.
How much does it cost?
Penalty fees are calculated based on several factors, including the difference between your original interest rate and the current rates, as well as how much time remains on your mortgage term.
These fees can range from a few hundred to several thousand dollars. Therefore, it’s important to weigh the potential savings against these costs before deciding to transfer your mortgage.
For advice tailored to your specific situation, it’s recommended to consult with your lender or mortgage broker.
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