This is the 16th article in our Mortgage Life Cycle Costs series.
What do we mean by Mortgage Life Cycle Costs and why write so much about this obscure and seemingly unimportant topic? Isn’t a mortgage just about getting the lowest rate? See the 1st article in this series for a more complete explanation, but briefly stated, Mortgage Life Cycle Costs are additional, non-interest mortgage costs that you could/will incur during your mortgage term. These costs are often indistinct, usually incurred later during the mortgage term and their severity depend on the lender, loan type, loan terms & conditions, product, interest rate, interest rate type, etc. Mortgage Life Cycle Costs can significantly exceed the comparatively small interest savings of enticing, but limiting, slightly lower interest rates.
By over-focusing on interest rates at the cost of the rest of the mortgage details, you can incur significant, but potentially avoidable mortgage life cycle costs.
While we believe lower interest rates are important, we have also seen interest rates distract clients from fully investigating other very important mortgage aspects. Here is why we think you should search for more than just an interest rate when choosing a mortgage. Canada’s largest banks are a saturated oligopoly. Oligopolists are typically very large and powerful, interdependent businesses that usually don’t risk competing by price [interest rates for mortgages], instead they compete by image, retention, etc. A quick review of banks’ websites should confirm our banks’ oligopolist relationships with each other; interest rates are very similar and widely published but very little if any details or education is available about the retention power of their specific mortgage products, terms & conditions etc. Therefore, why over-focus on obvious interest rates if banks’ rates are similar and rates aren’t their primary way of competing? Shouldn’t we be more concerned about what we are not shown? Wouldn’t we get better mortgages if we ask more questions about proposed mortgage products, their terms & conditions and potential consequential limitations and costs? We think so, hence we created these articles to draw your attention to mortgage life cycle costs and their potential to limit your future mortgage options and cost you a lot more than the relatively small interest savings of an appealing but limiting lower interest rate mortgage.
What is mortgage assumability? A feature offered by some mortgage lenders/products that allows a home buyer to take over [assume] a home seller’s existing mortgage on the subject property. This means that instead of the seller paying off the mortgage on the subject property and incurring a payout penalty, a buyer can potentially take advantage of the seller’s existing mortgage interest rate by assuming the seller’s existing mortgage on the subject property.
Let’s first review general, but important mortgage assumability information:
- Assumability Eligibility: If assumable, your mortgage’s assumption is subject to lender discretion. This means your existing mortgage’s terms & conditions typically refer to and determine assumability eligibility and your lender has the right to approve or decline your mortgage assumption application at the lender’s sole discretion.
- Variations: Not all lenders offer mortgage assumability, not all mortgage products are assumable and lenders’ assumption terms & conditions vary significantly.
- Verify: Check that the lender’s proposed product is assumable, don’t assume that asumability is a standard mortgage feature.
- Same Lender Only: If assumable, a mortgage can only be assumed with the same lender. Mortgage assumption is NOT applicable between different lenders.
- Benefits to Assumability: If eligible and assumption makes sense, here are some benefits to assuming a mortgage:
- Interest Rate – Buyer: The buyer takes advantage of existing mortgage rates, terms & conditions, etc.
- Marketability – Seller: If the subject property’s existing mortgage has benefits [e.g. lower interest rates, better terms & conditions, etc.] not available to applicants applying for a new mortgage, the seller might be able to sell their home quicker, realize a better sale price, etc.
- Mortgage Penalties – Seller: If assumed, the seller avoids paying a mortgage payout penalty.
In this section we will discuss the most common mortgage assumption types.
- Straight Assumption: If the mortgage is assumed at the same balance as the existing mortgage. The assumed mortgage rate should be the same as the existing mortgage’s interest rate.
- Assume & Decrease: If the assumed mortgage balance is LESS than the existing mortgage balance. The assumed mortgage rate should be the same as the existing mortgage’s interest rate.
- Assume & Increase: If the assumed mortgage balance is MORE than the existing mortgage balance. The assumed mortgage rate might be determined by a weight, blended interest rate based on the assumed mortgage balance and the existing and current, posted mortgage interest rates. This is often referred to as a “assume & extend” mortgage assumption.
- Keep & Add-on: If the assumed mortgage balance is MORE than the existing mortgage balance. However, unlike a traditional “Assume & Increase”, with this type of mortgage assumption the lender will leave the existing mortgage unchanged and add an additional mortgage component for the additional mortgage amount, to the overall assumed mortgage commitment. CAUTION: This might look like a good idea, however, if the mortgage components have mismatching maturity dates, this arrangement can be very costly in the future.
In this section we will explore when assuming a mortgage might make sense and when not.
- Do the Math First: Before you decide to assume a mortgage, make sure the existing mortgage is the best option for your circumstances. Get in touch with the seller’s mortgage provider and make sure you understand the mortgage’s terms & conditions, remaining term length, interest rate, etc.
- Lower Interest Rates: If current mortgage rates are lower than the existing mortgage’s interest rate it probably doesn’t make sense to assume an existing mortgage.
- Higher Interest Rates: Assuming a seller’s existing mortgage usually makes most sense when current mortgage rates are significantly higher than the existing mortgage’s interest rate.
- Risk: You should include your personal risk tolerance when deciding whether to assume a mortgage or not. E.g. Concerns about future, interest rate increases. E.g. If the existing mortgage’s term matures in one year, but rates are lower now than you believe they will be in one year, you may not want to assume the existing mortgage for only one year. Instead, you could apply a new mortgage, at a full, new term at current rates to protect yourself against the risk of potential, future higher interest rates.
When it makes sense, assuming a mortgage can be convenient and save you money. Here is important information that can affect mortgage assumability.
- Re-Qualification: The buyer must completely re-qualify for the mortgage they wish to assume and mortgage assumptions are also subject to lender approval, terms & conditions, etc.
- Assumption Approval: Don’t take anything for granted about assuming an existing mortgage even if the existing mortgage is eligible for assumption. Remember, everything about the existing mortgage’s assumability, including, without limitation, eligibility, term length, interest rate, amortization period, etc. is determined by the existing lender and ONLY once the lender has received the buyer’s final, live mortgage application and supporting documents and confirmation from the seller.
- Mortgage Changes: As part of their mortgage assumption eligibility criteria, lenders might prohibit including, without limitation the following changes to the existing mortgage: remaining amortization period, mortgage product changes, rate type changes [Fixed vs variable rates], property occupation, etc.
- Mortgage Term length: Each lender determines the assumed mortgage’s term length differently, but lenders often round up the existing mortgage’s remaining term length to the next full year. E.g. If the existing mortgage’s remaining time to its maturity date is 3 years & 4 months, the assumed mortgage’s term might be 4 years.
- Determining Assumed Mortgage Interest Rates: Lenders usually consider the following when determining an assumed mortgage interest rate:
- Posted Rates: The lender uses its posted mortgage interest rates, NOT discounted rates. Posted rates are usually significantly higher than discounted rates.
- Assumed Mortgage Term Length: The assumed mortgage rate will be based on the lender’s determined assumed mortgage term length, not the original mortgage’s term length.
- Mortgage Rules: Mortgage assumption eligibility is subject to many mortgage rules, etc., including mortgage default insurability. Typically, a mortgage can only be assumed to the same type of mortgage, based on the existing and proposed assumed mortgage’s, mortgage default insurability. E.g. An existing, insured mortgage cannot be assumed as an uninsurable mortgage and vice versa, while an existing, insured or insurable mortgage can usually be assumed as an insured or insurable mortgage.
- Fees: Lenders typically charge a nominal fee for mortgage assumptions. E.g. $300
- Property Occupation: Rental property mortgages are often ineligibly for assumability.
I hope you learned something from this article. Assuming a mortgage could save you money, so if you are interested in assuming a seller’s mortgage ask your realtor to inquire about it and then involve your mortgage broker as soon as possible to help you determine eligibility.
- The author is not a lawyer, accountant, financial planner, etc. therefore the author is not providing any professional advice, beyond that of a licensed Mortgage Broker in the province of Ontario, Canada.
- This content is not legal, economic, financial, accounting or any other professional advice. Any comments perceived to be outside the author’s Mortgage Broker licensing are purely anecdotal and shall not be construed as professional advice. Subject to all readers seeking independent professional advice from any and all providers as determined solely by the reader, at the reader’s own and sole discretion, prior to applying for or making changes to a mortgage/loan.
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