Homeowners who need to sell their house before the end of their mortgage term face a challenging decision regarding their mortgage. There are three primary paths: breaking the mortgage, porting the mortgage, or having the mortgage assumed. Each option has its unique pros and cons, and the best choice depends on individual circumstances.
Breaking Your Mortgage
Breaking a mortgage involves ending your current mortgage agreement. This might be necessary if other options aren't suitable. It usually incurs a prepayment penalty.
Example: Imagine Jane, who has a 5-year mortgage term. Two years in, she gets a job offer in another city. The job opportunity is too good to pass up, so she decides to sell her house and move. Since she's ending her mortgage term early, she chooses to break her mortgage, understanding that a prepayment penalty is involved. It's a cost she's willing to bear for her career advancement.
Porting Your Mortgage
Porting involves transferring your existing mortgage to a new property. This is only possible when buying a new property simultaneously with selling your current one. It's beneficial if your existing mortgage rate is lower than current rates. If you need a higher mortgage amount, your mortgage rate will be a blended rate, calculated between your existing mortgage rate and the current market rate.
Example: John and Emily bought a house with a fantastic mortgage rate. Three years later, they need a bigger home due to their growing family. They find a new house but don't want to lose their great mortgage rate. So, they opt to port their mortgage to the new property. This way, they transfer their existing mortgage, with its favourable rate, to their new home, saving them money in the long run.
Assuming a Mortgage
Mortgage assumption occurs when the buyer of your property takes over your current mortgage. This is a good option in a rising interest rate environment, allowing the buyer to benefit from a lower rate. The buyer must also be approved by the same lender before he/she can assume the mortgage. In certain instances, the seller may still be responsible for the mortgage payment if the buyer is unable to make payment. Check your assumption clauses in your mortgage documents before making this offer.
Example: Alex is selling his home in a market where mortgage rates have risen significantly since he bought his house. His current mortgage rate is much lower than what's available now. The buyers of his house, seeing the advantage of the lower rate, agree to assume Alex's mortgage. This makes the property more attractive to the buyers, and Alex benefits from not having to break or port his mortgage.
Comparison Chart
Feature | Breaking Mortgage | Porting Mortgage | Assuming Mortgage |
Definition | Terminating your current mortgage agreement before the end of its term. | Transferring your current mortgage to a new property. | Transferring your mortgage to the buyer of your property. |
Ideal Scenario | When other options are not suitable or financially advantageous. | Buying a new property while selling your current one. | Selling your home without purchasing a new one. |
Key Benefit | Ends current mortgage obligations. | Retains existing mortgage rate and terms on a new property. | Allows the buyer to benefit from a lower mortgage rate. |
Financial Consideration | Prepayment penalty likely. | Avoids prepayment penalty, beneficial if current rate is lower than market rates. | Buyer may need to cover the difference between mortgage balance and sale price. |
Risks/Constraints | Financial penalty for early termination. | Not all mortgages are portable; limited time window for porting. | Seller's responsibility until buyer makes 12 consecutive payments; buyer’s financial |
Conclusion
Selecting the appropriate option requires careful consideration of your financial situation, the nature of your mortgage, and future housing plans. Consultation with a mortgage professional is highly recommended to make an informed decision that best suits your needs and goals.
