This is the 15th 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 portability? A feature offered by some mortgage lenders/products that allows borrowers to transfer their existing mortgage from a sold property to a newly bought property. This means that instead of paying off the mortgage on the current property, incurring a payout penalty and taking out a new mortgage on the new property, borrowers can potentially take advantage of their existing mortgage interest rate and “port” or transfer their existing mortgage, to the new property, without a mortgage penalty.
We will explore portability features, terms & conditions, pitfalls, types, etc. below.
Let’s first review general, but important mortgage portability information:
- Porting Eligibility: If portable, your mortgage’s portability is subject to lender discretion. This means your existing mortgage’s terms & conditions typically refer to and determine portability eligibility and your lender has the right to approve or decline your mortgage porting application at the lender’s sole discretion.
- Variations: Not all lenders offer portability, not all mortgage products are portable and lenders’ portability terms & conditions vary significantly.
- Don’t Assume: Check that the lender and its proposed product offer portability, don’t assume that portability is a standard mortgage feature.
- Same Lender Only: If portable, a mortgage can only be ported with the same lender. Portability is NOT applicable between different lenders.
- Benefits to Porting: If eligible and porting makes sense, here are the usual, primary benefits of porting your mortgage:
- Interest Rate: Take advantage of your existing mortgage rate.
- Mortgage Penalties: Avoid paying mortgage penalties when you move your ported mortgage from one property to another.
In this section we will discuss the most common portability types.
- Straight Port: If your new mortgage balance remains the SAME as the existing mortgage. Your ported mortgage rate should be the same as your existing mortgage interest rate.
- Port & Decrease: If your new mortgage balance is LESS than the existing mortgage balance. Your ported mortgage rate should be the same as your existing mortgage interest rate.
- Port & Increase: If your new mortgage balance is MORE than the existing mortgage balance. Your ported mortgage rate might be determined by a weight, blended interest rate based on the new mortgage balance and your existing and current, posted mortgage interest rates. This is often referred to as a “blend & extend” port.
- Keep & Add-on: If your new mortgage balance is MORE than the existing mortgage balance. However, unlike a traditional “Port & Increase”, with this type of port the lender will leave your existing mortgage untouched and add an additional mortgage component for the additional mortgage amount, to your overall 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 portability make sense and when not.
- Do the Math First: Don’t assume porting your mortgage is the best option for your circumstances. Before you start to sell or buy a property, request your mortgage provider to do the math for porting or breaking your mortgage, to justify their proposed mortgage for your new purchase’s mortgage.
- Lower Interest Rates: If current mortgage rates are lower than your existing mortgage interest rate it might make sense to break your existing mortgage, pay the payout penalty in lieu of a lower interest and a new, full mortgage term. Note: Do the math first to make sure the new lower interest rate savings will offset the lenders payout penalties.
- Higher Interest Rates: Porting usually makes most sense when current mortgage rates are significantly higher than your existing mortgage interest rate.
- Risk: You should include your personal risk tolerance when evaluating your portability choices. E.g. Concerns about future, interest rate increases. E.g. If your existing mortgage term matures in one year, but rates are lower now than you believe they will be in one year, you may not want to port your existing mortgage for only one year. Instead, you could opt to pay the mortgage penalty and accept a new mortgage, at a full, new term at current rates to protect yourself against the risk of potential, future higher interest rates.
Porting your mortgage, if porting makes sense for your situation, can be convenient and save you a lot of money. Here is important information that can determine or affect mortgage porting.
- Transaction Types: Typically, only purchase mortgage transactions of sold properties are eligible for portability. Refinance, switch, etc. transactions are normally ineligible for portability.
- Re-Qualification: Mortgage ports are subject to full mortgage re-qualification, lender approval, etc. This means mortgage ports are NOT just simply moving a mortgage from one property to another without requalification. The mortgage port, which includes the new property has to be approved by the lender subject to its terms & conditions, etc.
- Porting Approval: Don’t assume your mortgage will be ported even if it is eligible for porting. Everything about your mortgage’s portability, including, without limitation, eligibility, new term length, interest rate, amortization period, adding/removing applicants, etc., is determined by your lender and ONLY once the lender has received your final, live application and supporting documents for your newly purchased property.
- Portability Time Limit: Lenders usually apply a 30-90 days’ time limit to mortgage ports when the sold property closes BEFORE the purchased property. i.e. To be eligible for porting your purchased property must close no later than 30-60 days after the closing date of your sold property. The porting time limit is usually inapplicable for mortgages that close before the sold property’s closing date.
- Mortgage Penalties: If your sold property closes before your purchased property, your lender will most likely charge you the payout penalty and then refund you the penalty after your ported, purchase mortgage has closed.
- Mortgage Changes: For porting eligibility, lenders might prohibit including, without limitation the following mortgage changes: Adding or removing applicants, changing the remaining amortization period, mortgage product changes, rate type changes [Fixed vs variable rates], property occupation, etc.
- Port Term length: Each lender determines the ported mortgage’s term length differently, but the most common way is to round up your remaining term length to the next full year. E.g. If your existing mortgage’s remaining time to its maturity date is 3 years & 4 months, the ported mortgage’s term might be 4 years. The
- Port Interest Rates: Lenders usually considers the following when determining your ported 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.
- Port Term Length: The ported rate will be based on the lender’s determined port term length, not the original mortgage’s term length.
- Plan Ahead: Your existing mortgage determines your portability eligibility and viability, so be careful with your new mortgage and structure it to give yourself the best chances to port in the future. E.g. If your existing mortgage has a 12 year amortization, but you plan to sell and purchase a new, larger home within 2 years of your next mortgage term, will you be able to qualify for the larger, mortgage with a 10 year [12 years – 2 years] amortization period?
- Mortgage Rules: Mortgage porting eligibility is subject to many mortgage rules, including mortgage default insurability. Typically, only similar mortgages can be ported to the same type of mortgage, based on the existing and proposed ported mortgage’s mortgage default insurability. E.g. An existing, insured mortgage cannot be ported to an uninsurable mortgage and vice versa, while an existing, insured or insurable mortgage can be ported to an insured or insurable mortgage.
- Fees: Lenders typically charge a nominal fee for porting a mortgage. E.g. $300
- Property Occupation: Rental property mortgages are often ineligibly for portability.
I hope you learned something from this article. Pay close attention to your mortgage’s portability and portability features, it could save you a lot of money and help you pay your mortgage off quicker. Ask your mortgage broker to pre-qualify and investigate portability for your new property purchase before you buy or sell a home, it should give you peace of mind.
- 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.
- The opinions expressed in this content are the opinions of the author only and not of anyone else or any other entity.
- Not for decision-making purposes.
- Subject to eligibility, lender approval, terms & conditions, etc.
- In any and all cases of any conflict of any kind about anything whatsoever in this content, including, without limitation, lender rules, guidelines, terms & conditions, interest rates, etc., the appropriate authority’s content shall supersede the author’s presented content.
- Based on estimates. Subject to change in any or all ways, at any time, without prior notification or warning.
- Does not include all, may exclude some and/or may only partially represent guidelines, mortgage rules, scenarios, topics, etc.
- Not specific to any specific mortgage lender or mortgage related product, content may be inconclusive, incomplete and/or covered somewhere else, etc. Products, underwriting guidelines, etc. vary between lenders, etc.
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