Porting your mortgage: how to do it right
The first home you purchase isn’t always your dream home—and that’s perfectly fine. If you bought your home a few years ago but found another home that you can’t pass up, what happens to the mortgage on your current home?
If you decide to sell but are in the middle of a five-year term, breaking your mortgage isn’t the only option. You may actually be able to port your mortgage instead.
What does it mean to port your mortgage?
Porting your mortgage means taking your existing mortgage (including its same rates and terms) and transferring that to the new property. But you’re only allowed to port your mortgage if you’re selling your old home at the same time you’re buying the new one, and the process has to be done with your current lender.
While porting a mortgage may sound similar to refinancing, porting a mortgage doesn’t always require you to break your mortgage terms and pay the prepayment penalties. But what if you’re upsizing or downsizing, and the home valuations are different? Your mortgage lender should be able to offer what’s referred to as a “blend and extend.” This allows you to mix your old interest rate with the new term’s interest rate and can help you avoid penalty fees—although admin fees may still apply.
Here’s an example of how the financials of porting work:
Let’s say that you currently owe $400,000 on your mortgage, and your interest rate is 2.1% and you’re three years into your five-year term. The new home you’d like to purchase is more expensive, which means you’ll need an additional loan of $100,000, but now interest rates are at 3.5%. This means, your lender will probably offer you a rate that sits between the two, so about 2.8%.
Similarly, your mortgage term at this rate will go back to five years.
When does it make sense for you to port your mortgage?
There are a couple of situations where it makes sense for you to port your mortgage.
1. To avoid penalties for breaking your mortgage
Porting might help you avoid paying the penalty for breaking your existing mortgage. The typical term of a mortgage in Canada is five years, and almost all lenders charge a prepayment penalty if you break the mortgage before the end of the term—which can amount to thousands of dollars.
Plus, you’ll likely have to pay the other admin charges on top of that when you decrease the amount of the mortgage for the port.
However, it’s important to note that if you’re porting your mortgage to one that is less than the current cost of your new home, you’ll likely have to pay prepayment penalties in that regard.
For example: Let’s say you have $300,000 left on your mortgage and want to downsize, but upon porting your mortgage, you realize you only need $200,000 to cover your new home, and you have a $50,000 prepayment privilege for the year. This means that for the $100,000 difference between your new and old mortgage, you can pay off the $50,000 for the year, but for the second $50,000 you’ll need to pay the interest rate differential penalty for “breaking your mortgage.”
2. If the current mortgage rates are higher than your existing rate
Also, you’ll want to port your mortgage if you have a competitive fixed mortgage rate that you don’t want to lose. But keep in mind that this makes the most sense when your current mortgage rate is much lower than what’s currently being offered by lenders since your blended rate should still be lower than if you were to get a new mortgage.
When does it not make sense for you to port your mortgage?
If the mortgage rate you can get today is lower than the rate you currently have, it may not make sense for you to port. Instead, you could consider refinancing your mortgage to access these lower rates. You’re probably well aware that interest rates in Canada increased significantly in 2022, so it’s unlikely that you would find a mortgage rate lower than you currently have.
How do I port my mortgage – the right way?
Porting your mortgage sounds pretty good, right? Unfortunately, porting your mortgage can only work in some situations, and there are a few hoops to jump through first to make sure that you qualify.
1. Discuss with your lender
Some lenders allow porting, but some do not, and others operate on a case-by-case basis. Variable-rate mortgages are often not portable unless you switch to a fixed rate, which could also involve administrative fees. However, all lenders have their own porting rules, so we recommend contacting yours to find out what you can realistically do.
2. Find out your lender’s porting time limit
Timing is everything when it comes to porting. The time you have to complete the port and sell your existing home will vary depending on your lender, but the typical porting time limit is anywhere from 30 and 120 days. Thirty days is exceptionally tight, and you may face some issues. But 120 days should be enough time to purchase the new property and close the sale of your existing property if you act quickly.
3. Make sure you’re eligible to port your mortgage
You will still need to qualify when porting a mortgage. Your existing lender will carry out the same qualification process as when you first applied for the original mortgage. You’ll also need to put a down payment on the new home. If you close on your new home before you sell your old one, then you’ll have to pay the down payment without having the home sale proceeds just yet.
If you can’t afford the down payment without the sale proceeds, ask your lender if they provide bridge loans, which are loans to help bridge the gap when you’re porting. Not all lenders offer bridge loans, so you’ll want to discuss your options with your lender first.
The bottom line
When done right, porting your mortgage can help you avoid penalties for breaking your mortgage early and can also help you maintain a competitive mortgage rate. However, whether you can port your mortgage or not ultimately depends on your lender’s specific policies. We get it—hindsight is always 20/20. But, you can keep your knowledge on porting in your back pocket if you need to break your mortgage and opt for a new lender.
Have questions about porting or breaking your mortgage? A mortgage agent at Pine would be happy to help.