A buyer called me recently to pre-approve him for a $490,000 mortgage as he is upgrading the family home. Today he has a $250,000 mortgage with a major chartered bank. I am able to comfortably approve him with practically any lender, but I suggested he first go back to the bank to ask them how much will the prepayment penalty be on his much smaller current mortgage.
He was shocked to learn it will cost him $13,000 to break the old mortgage, which matures in 2018 and has a reasonable rate of 2.99%. Much as it pains me to redirect business back to this same lender, I told him there is a silver lining here. He can stay with the bank and keep the existing mortgage. In fact, they will transfer it (port it) over to the new property. And they will increase the mortgage by an additional $240,000 at current rates.
- He will end up with a “blended” mortgage, and most importantly he will not have to pay any penalty – thanks to the portability feature.,
- A “portable” mortgage has an option that allows the borrower to transfer the mortgage to a new property (usually subject to credit approval and a property appraisal).
- The benefit is that the borrower avoids paying a penalty to break the mortgage early. The homeowner also gets to keep his/her present interest rate after moving.
- Of course, I would prefer you avoid borrowing from a lender with a usurious prepayment penalty calculation; but if that is your wont, make sure at least you have flexibility with portability.
- Not all mortgages are portable. If there is any possibility you may need to sell or refinance your home before your term is up, you should perhaps look elsewhere for your mortgage.
While researching this article, I found a very good discussion about portability at Money Saving Expert. It’s a UK website but the portability content is great for Canada.
Related Article: Friendly lenders offer low mortgage penalties
Related Article: You should understand mortgage prepayment penalties
Ross Taylor & Associates – Connect With Us