If you are in a fixed rate mortgage and need to sell your property before the term is up, you may be able to exercise the Portability feature of your mortgage if you are buying another property.
When you obtain a fixed rate mortgage, you essentially sign a promise to pay the bank for the length of the term chosen. Banks treat this promise to pay as investible asset and will commit to other investments with the expectation that the interest revenue from your mortgage will be ongoing until the maturity date of the term, ie 5 years. If you break your interest rate contract, the bank will ask for their replacement cost of funds, which in plain terms, means they will charge you a penalty for paying off the mortgage early. This applies whether you sell your home or pay it off early from your own resources. Monoline lenders often have a lower replacement cost of funds, and may have lower penalties. Click here for our information page that discusses fixed rate vs. variable, and the associated penalties with each.
One way you can avoid paying the penalty is by exercising the Portability feature. If you are buying another property, you can ask the bank to transfer the balance of your mortgage with the rate you already have, to the new property being purchased. In doing this, the bank does not lose their original interest revenue, and the penalty is not charged. When exercising Portability, your lender will go through all the usual steps to requalify your application. If you need to borrow additional money to acquire the new home, there are a few different ways the banks do this:
- You borrow the new funds at current rates and end up with a blended rate for the entire new mortgage amount & keep your existing maturity date, or
- The bank gives you an entirely different segment for the new funds. This results in having one maturity date for the original portion, and a separate maturity date for the new portion, or
- They offer you a ‘blend and extend’ which means they provide you with a new mortgage term for the new total amount, but factor in the cost of the penalty to your overall rate.
The following reasons outline why portability is sometimes not an option:
- You have had a change in how you qualify.
- The new property being purchased does not meet the bank’s lending criteria.
- The new property is outside of your existing bank’s lending area.
- You are buying a lot and now require a construction mortgage.
If you are selling and buying something less expensive and only need to port a portion of the mortgage, the bank will usually accommodate you to transfer the amount you need. They will however, charge you a penalty on the amount you are paying off, and they will still requalify your application even if you are borrowing less.
A way that you can sometimes reduce your penalty is by exercising your annual prepayment privilege before the sale goes through. You pay down your mortgage based on what the bank will allow per their annual prepayment policy, and the penalty will be calculated on the lower outstanding balance.
If there is a window of time between the closing date of your sale and the closing date of your new purchase, ie 30 days, it is best to check with your lender to see what their policy is on re-applying and having the penalty reimbursed.