For homeowners in Canada, the decision to relocate often comes with the additional consideration of how to best manage their mortgage debt. The options are either to port the existing mortgage to the new property or break the current mortgage and initiate a new one. Each alternative carries risks and rewards, and the best decision can span a lifetime.
This article will analyze the costs associated with breaking or porting the mortgage, the best-case scenarios in which each option is ideal, and the costs private lenders may charge as opposed to traditional lending institutions.
What Is Mortgage Porting and When Can You Use It?
Porting a mortgage allows you to transfer your current mortgage interest rate and balance to the new home, provided you have terms that you may want to retain. This most commonly occurs with fixed-rate contracts, but may depend on the lender’s policy and the mortgage agreement.
Many require the new house to be purchased 30 to 120 days after selling the current one. They also require the borrower to meet other approval conditions. If the new home is more expensive, a “blend and extend” option may be offered, combining your existing rate with the current rate for the additional amount.
What Is Mortgage Breaking and Why Do Homeowners Do It?
Breaking a mortgage is discontinuing the current loan or mortgage agreement before it naturally ends; it often requires a prepayment penalty and other costs. Homeowners may break the mortgage to take advantage of loans with a better interest rate, change lenders to find better terms, or refinance the mortgage to use the equity in their home.
Mortgages may also be broken due to divorce, moving for work, and emergencies that may arise. Divorce, job relocation, and other financial emergencies can also catalyze these breaks. At the same time, it is often prudent to assess whether these breaks will save money in the long run; calculated penalties and fees need to be precise in determining an overall cost-saving strategy.
Cost Comparison: Porting vs. Breaking
Unlike breaking a mortgage, porting a mortgage involves minimal expenses, like administrative and appraisal fees, and the benefit of not having to pay prepayment penalties. This is often the case with borrowers with lower-than-market prevailing interest rates because porting is often cheaper than breaking.
However, as indicated, breaking a mortgage can be expensive. In Canada, the mortgage penalties for fixed-rate mortgages are usually the greater of three months’ interest or the interest rate differential (IRD), which compares your mortgage rate with the rates of existing mortgages. Variable-rate mortgages often use the simpler penalty of just three months’ interest.
Private Lenders and Mortgage Flexibility: How Do They Handle Porting or Breaking?
Private lenders in Canada offer less flexibility than traditional banks regarding mortgage porting. While porting is a common feature with conventional lenders, private lenders typically do not allow it. Private mortgages are generally short-term, usually one to two years, and intended for short-term financing situations and not long-term homeownership. As a result, if a borrower sells the asset, the mortgage is typically expected to be discharged in full.
Breaking a private mortgage, however, can be simpler and sometimes less expensive than breaking one with a traditional bank. Private mortgages often have clear exit terms, interest-only payment structures, and fewer prepayment restrictions. Prepayment penalties are typically straightforward, generally a few months’ interest, and therefore, the costs are easier to estimate. However, borrowers should read specific lender terms carefully since prepayment penalties have different terms and costs.
How to Decide: Key Questions to Ask Before Choosing
Determining the most financially favourable option between porting and breaking a mortgage requires careful consideration of your financial situation, mortgage terms and conditions, and plans moving forward. Start by comparing your current interest rate with today’s market rates. Porting is likely the more cost-effective if your existing rate is much lower. Nevertheless, if mortgage rates have substantially dropped and you break your mortgage, you might save quite a bit in the long run, even with a penalty.
Next, look through your mortgage contract for information regarding porting (the ability to transfer your mortgage to another property), fees, and penalties. You’ll want to look closely at how your lender calculates prepayment penalties, primarily interest rate differential (IRD), since it can be complicated and expensive.
You’ll also want to consider your financial objectives in the future. Suppose you intend to move frequently or expect a significant life event. In that case, you may look for flexible mortgages or lenders with better terms and fewer expectations for breaking a mortgage contract.
If you are borrowing from a private lender, be sure to check under the hood as far as the terms and conditions of your mortgage go. Many private mortgages don’t allow it to be ported, leaving breaking the mortgage as the only real option to pursue. In such a case, please know what penalties exist and whether they are fair. If you’re unclear about the costs or risks of your options, consulting a financial advisor or broker is worthwhile.
Choosing Wisely: The Right Mortgage Decision for Your Situation
Deciding to break or port a mortgage means weighing short-term costs against long-term savings and financial flexibility. Mortgage porting suits homeowners who are satisfied with their current mortgage conditions and want a secure, low-cost, predictable borrowing source. Breaking a mortgage makes sense when savings from better rates or terms outweigh the penalties and fees involved.
Private lenders less frequently establish porting options. However, breaking a mortgage is far more straightforward and penalized by money. It is essential to know the details surrounding the porting or breaking options presented by any given lender. In the end, consider your current situation and future plans. Professional input can help you choose the most cost-effective option.
