I’m working with a couple (let’s call them Ken and Barb) who are relocating to B.C. from Saskatchewan. They bought their first home just over two years ago, so they are in the middle of their mortgage term.
When Ken and Barb bought their home, we had a conversation about plans for the future. Their intent was to stay in Regina, close to family. I looked at several different lenders and ruled out a few offering rate specials because those rate specials came with restrictive terms for early payout.
Even though Ken and Barb told me they planned to stay put, Ken was head-hunted by a recruiting firm and offered a position in the sunny Okanagan. The new position involves a significant raise and the opportunity for them to be closer to medical specialists their son needs to see regularly.
Statistics show that two out of three Canadians break their mortgages by the 33-month mark. When I use the term break, I mean that people either sell or refinance their home, which means they pay out the original mortgage.
Because of this statistic, one of the features I look for when placing clients with different lenders is a portability option.
What does porting your mortgage mean?
Porting your mortgage essentially means that you transfer the conditions of your current mortgage when you sell, to a new mortgage when you buy again.
This means you take the current interest rate, remaining term, and amortization to your new property.
Most times the amount does not line up exactly, and often there may be a difference in dates. Each lender handles this slightly differently.
Many lenders will allow a window of time for you to take advantage of this feature if you do not buy right away. You will likely have to pay your penalty in full if the new mortgage does not close at the same time.
The penalty is then rebated back to you if you sign for a new mortgage within a certain time frame (usually about three months).
I reached out to Ken and Barb’s current lender this morning. Based on their mortgage, if they were to pay the mortgage in full today they would be looking at a penalty of almost $3,000.
Because we went with a lender who offers portability, we will be porting their mortgage to the new home in B.C. This is a double win, as their interest rate of 2.24 per cent is fixed for another three years. There will be no penalty involved as they are borrowing almost the exact same amount of money.
If you are comparing interest rates and see rock-bottom rates, it is important to review the conditions of the mortgage. Sometimes a lender will offer two rates only .05 per cent apart. The lower rate is often a low or no-frills option, which means that portability may not be an option or that your pre-payment privileges are reduced.
Sometimes the lower rate options will not allow you to break your mortgage unless you sell your home.
Another situation I ran into last week involved a client who opted for a cash-back mortgage.
With the cash-back mortgage, their lender credited them with additional funds at the time their new mortgage was advanced. For some clients this works well.
The cash could be used for updates or improvements to their new home, or to pay off debts like loans or credit cards.
In this case, they received $25,000 when they bought their home. As they bought a slightly dated home in a great neighbourhood, they were able to use this money to do updates and renovations.
At the time, they asked their banker if they would be able to port their mortgage. They had moved to Kelowna from Ontario and intended to move back to Ontario within a few years. They were assured that it would be no problem to port the mortgage to a new property in Ontario.
What they weren’t told, and learned the hard way, was that if they broke the mortgage before their five-year term was up, they would have to repay every penny of the cash-back amount.
It didn’t matter that they had already made four years’ worth of payments on the mortgage.
Mortgage documents involve a lot of fine print. When you are caught up in the excitement of buying your home it is tempting to skip or not read everything thoroughly.
Pre-payment terms are clearly laid out for you in your mortgage commitment. The mortgage commitment is the initial document from your lender that outlines all of the terms and conditions you are signing for.
Working with a mortgage professional is important. Buying a home is one of the largest financial commitments most people make.