Introduction
Are you considering selling your current residence before the end of your mortgage term and buying a new house? Several alternatives are open to you. For example, you could repay the mortgage loan taken out on the house you are selling early and pay penalty fees. However, this first option can be costly, so consider a mortgage transfer. This solution allows you to keep the conditions of your current loan and apply them to your new property. Discover the essentials about mortgage transfers with your Xperto broker.
What should you know about mortgage transfers?
Like many mortgage borrowers, you may be led to change your life at one point or another while your credit term is still ongoing. For example, a new job or a professional project may prompt you to sell your current house and buy a new one.
Many first-time buyers in Canada are in a similar situation. While they still have 2 or 3 years left to repay on their 5-year mortgage term, significant changes in their lives push them to sell their house acquired on credit to move into a new property. When you are in this case, a mortgage transfer is one of the solutions.
- What is a mortgage transfer?
Your mortgage, in other words, the loan you took out to buy your current house, is attached to that property. But if you decide to sell your current property and buy another one, you have the possibility to transfer, or port, this mortgage loan to your new house. This process is called a “mortgage transfer”.
- Is a mortgage transfer always possible?
The possibility of transferring a mortgage depends on several factors, including the lender and the type of mortgage you have taken out. Variable-rate mortgages are generally excluded from this option.
To find out if this solution is possible in your personal case, requesting the tailored support of a professional like your mortgage broker is often essential. For a mortgage transfer to be considered in your situation, your lender must first approve it. The presence of a specific clause must necessarily be included in your mortgage loan contract.
The lender’s approval may also involve a new appraisal of the property you are buying and a verification of your financial situation. These measures may be taken to ensure that you are still able to repay the transferred mortgage.
Why carry out a mortgage transfer?
Several reasons may lead you to choose a mortgage transfer from the current house you are selling to the one you are about to acquire:
- to keep the conditions of your current mortgage
When you have negotiated a very competitive interest rate on your current loan, transferring it allows you to keep this rate for your new house. If conditions have changed, particularly in the case of an increase in the interest rate, since you contracted your mortgage, the transfer allows you to keep the amount of your monthly mortgage payments as well as the current term and the total duration of your repayment.
- to avoid the procedures and payment of fees for taking out a new mortgage
The fees associated with obtaining a new loan, such as notary or appraisal fees, are generally high. By transferring your existing mortgage, you avoid some of these costs. Regarding the procedures to be initiated, the transfer process can also be simpler compared to taking out a new mortgage.
When to transfer a mortgage?
The best time to transfer an existing mortgage to a new house is generally when you are selling your current property and buying your new property at the same time. This timing is ideal because by combining the two transactions, the process is simplified: you do not have to manage two loans simultaneously, and the administrative procedures can be less time-consuming.
- What are the deadlines for a mortgage transfer?
Lenders grant a deadline for a mortgage transfer. The period generally allowed extends from 30 to 120 days. This deadline begins when the borrower decides to transfer their mortgage and ends when all the formalities related to the sale of the old home and the purchase of the new one are finalized. During this time, the borrower must complete the sale of their home and meet all obligations for the purchase of their new property. Respecting this deadline is very important, as the lender may refuse the transfer if it is exceeded.
- What are the options if the new property requires a larger mortgage?
Several particular situations may arise. Each requires a specific analysis prior to the signing of the agreement to determine if the mortgage transfer is the most appropriate procedure:
- mortgage transfer at a mixed or weighted interest rate, when the new house requires a larger amount than the mortgage to be transferred
It is possible that you need to borrow more for your new house. Your lender may then offer to combine your old mortgage with the one allowing you to buy your new house. Your new mortgage will then have a new interest rate which will be a weighted average between that of your old loan and the current market rate. Therefore, if interest rates have increased, that of the mortgage for your new house will be higher compared to that of your old mortgage, but lower compared to the current rate. This option will increase the total cost of your loan.
Imagine, for example, that you are now paying the third year of your 5-year mortgage term with a balance of $250,000 at an interest rate of 2.18%. You decide to acquire a new property requiring a mortgage loan of $350,000, while current interest rates are 4.84%.
You thus need an additional $100,000. Your lender can allow you to combine the two financings by increasing your interest rate when transferring your mortgage. In this case, your interest rate is called mixed or weighted. It will be approximately 3.51%, for a mortgage term reset to 5 years.
- taking out a hybrid mortgage loan, a combination of a mortgage transfer with the subscription of a new mortgage
Imagine that your current mortgage still has 2 years left. With a hybrid mortgage, you can transfer this loan and keep its interest rate of 2.18% for the next 2 years. However, you need an additional amount of $100,000 to buy your new house. If the bank approves the proposal, you can take out a new mortgage at current interest rates for a term of 4 years, for example. You will thus have two distinct loans on your new property.
- Xperto advice
Depending on your case and regardless of the deadlines granted for setting up your mortgage transfer, it is essential to carefully compare the different terms related to this operation.
Various questions must be asked:
- are all the conditions of your current mortgage retained when transferring to your new property?
- do the characteristics of your future mortgage present changes compared to the old one?
To make an informed decision, the support of a mortgage broker like Xperto is necessary. By being aware of all the possible modifications related to the operation, you are able to decide if a mortgage transfer is more interesting than taking out a new mortgage with new loan conditions, for example.
How to transfer a mortgage?
A mortgage transfer requires essential preparation time. You must prepare for the different phases that mark this process. The preliminary phase first begins with an interview with your lender. Talk about your project with your bank. Inquire about the possibilities of transferring your mortgage and discuss the conditions.
Your bank will also need the value of the new house you wish to acquire. If you are considering requesting additional financing with your mortgage transfer, calculate the amount you will need, taking into account your down payment and the purchase price.
Then, prepare your file and complete the required documents as during your first mortgage.
Upon receipt of your lender’s proposal, read your contract carefully. Make sure you understand all the clauses before signing. Then, organize yourself by coordinating the following steps with your real estate agent, your notary, and your bank so that all the formalities go smoothly. Finally, finalize the transfer: once your current house is sold, your mortgage is transferred to your new property.
Advantages of mortgage transfer
Choosing a mortgage transfer offers many advantages:
- avoid paying penalties
This process allows you to bypass the prepayment penalties associated with breaking your mortgage term before its end. Thus, by transferring your mortgage, you avoid terminating your current mortgage loan and taking out a new one. This solution can save you thousands of dollars.
- avoid taking out a new mortgage at a higher interest rate
Mortgage rates have increased considerably in Canada in recent years. By transferring your mortgage, you can keep the interest rate of your current mortgage, which is probably lower than the rates offered on the market today. Here too, you can make substantial savings.
Disadvantages of Mortgage Transfer
A mortgage transfer is an interesting operation in certain situations, but it can also present significant costs:
- potential fees to anticipate
Even if a mortgage transfer allows you to avoid prepayment penalties, it is essential to consider the additional costs that may be associated with this operation. Lenders may impose fees for transferring your mortgage, significantly increasing the costs associated with the process. It is therefore necessary to verify that the mortgage transfer is a financially interesting operation before making a decision.
- the conditions proposed by the lender
The mortgage transfer is subject to the approval of your lender. There may be specific conditions or additional requirements, such as the appraisal of the new property and a review of your financial situation.
- higher interest rates, such as the mixed interest rate
If you need to borrow an additional amount to buy your new house, you may end up with a mixed interest rate, higher than that of your current mortgage.
- an inflexible solution
A mortgage transfer requires precise synchronization between the sale of your home and the acquisition of a new property. The operation is conditional on the sale of your current property and the purchase of a new one within a period generally set between 30 and 120 days by the lender. This requirement for simultaneity can limit your choice and force you to make a perhaps hasty purchase decision if you do not quickly find a property that suits you. If you need more time to sell your old property, a bridge loan is a temporary and conceivable solution to finance the purchase of your new house.
Frequently asked questions about mortgage transfers
- What are the penalties for transferring a mortgage before the term?
There are no penalties for transferring a mortgage before the term to a new property. A mortgage transfer is an option that allows you to transfer your current mortgage loan, including the rate and conditions, to a new property without paying penalties.
On the other hand, some costs may eventually be associated with the transfer of your mortgage, including appraisal fees, administrative and legal fees, as well as additional default insurance premiums (CMHC) if you are transferring an insured mortgage to a new property and you need to insure the new mortgage loan.
- How long does the mortgage transfer process take?
The timeframe for transferring a mortgage loan from one house to another in Canada is generally 30 to 120 days, depending on the lender.
- Can I transfer a mortgage with a fixed or variable rate?
The possibility of transferring a mortgage with a fixed or variable rate depends on the conditions of your mortgage contract and your lender’s policy. Most banks refuse transfers of variable-rate mortgages. Check your mortgage contract or ask for the opinion of your Xperto broker to find out if the transfer of your mortgage is allowed. For a mortgage loan transfer to be possible, the loan contract must include a clause to that effect.
- How do I know if a mortgage transfer is the best option for me?
It is appropriate to verify that a mortgage transfer can be an interesting solution for you. Before making a decision, consult your Xperto broker who will be able to tell you if this operation is financially advantageous according to your situation.
Conclusion
If you are considering buying a new house, the possibility of transferring your existing mortgage can be a wise move. This solution allows you to keep the same borrowing conditions. By choosing a mortgage transfer, you avoid early repayment fees on the credit of the property you are selling. The Xperto broker team is at your service to help you understand all the options available according to your situation.