If you are planning to move into a new family home, you may be wondering what you should do with your existing mortgage. Of course, you can prepay it, but you will likely get hit with a hefty prepayment penalty.
Another option is to port your mortgage, which allows you to take your mortgage with you and can be a cost-saving option in certain situations.
But what does porting a mortgage mean? When is it a good option and how do you port your mortgage? Keep reading to find out the answers.
What does porting a mortgage mean?
Porting a mortgage means transferring your current mortgage to a new home, instead of taking out a new mortgage. The good news? You can save thousands of dollars in interest over the life of your loan if your existing rate is lower than what other lenders are currently offering you. Moreover, you will not have to pay a penalty — called the prepayment fee or charge — for breaking your mortgage. The prepayment fee varies from one lender to another and depends on several factors, for example when you exit the contract and the mortgage balance at that point in time; but it can often be as high as 2% of the mortgage balance.
Here are some key points you should keep in mind if you are thinking about porting your mortgage:
- You can port your mortgage only when you buy a new property at the same time you sell the old one. The time-limit for transferring a mortgage varies by lender. Some allow just 30 days to close the sale of your old home and complete the purchase of the new one, while others allow up to 120 days.
- When you transfer a mortgage to a new property, you get to keep all its existing terms and conditions, including the interest rate and repayment benefits.
- If you are moving into a more expensive home, your mortgage interest rate will change. The lender will offer you an option known as the blend and merge mortgage. Basically, you are blending your existing interest rate with the rates currently being offered the lender and extending the length of the mortgage term. Your blended rate will fall somewhere between your existing mortgage interest rate and current market rates. With the blend and extend option, you can escape paying a prepayment charge, since it does not involve breaking your current mortgage.
- If the new home you want to buy is cheaper than your current one, you will repay part of your loan. Mortgage lenders’ terms and conditions vary, but most charge a hefty prepayment fee on a partial repayment. Since an early-repayment charge defeats the whole purpose of porting a mortgage, you may be better off taking out a new loan.
- Even if your mortgage is portable, there is no guarantee that your lender will approve your request. You can face rejection if your circumstances have changed — for example, you now earn less or have become self-employed — or if the lender’s criteria have become more stringent.
When should you port your mortgage?
Porting your mortgage can be a good choice if the rate of interest of your mortgage is lower than current market rates. Whether you can transfer your mortgage or not depends on several factors. These include:
Your mortgage contract
First and foremost, check whether your mortgage is portable or not. While porting is added by default in most mortgage contracts, some are not portable. If your contract does not include it, there is nothing you can do. Mortgage contracts are not something you can change later.
Your interest rate
Mortgages interest rates are either fixed rate or variable rate. When you buy a fixed-rate mortgage, the interest rate remains the same for the entire term of the loan. A variable-rate mortgage, in contrast, is a loan where the interest rate changes with the lender’s prime rate.
Typically, only fixed-rate mortgages are portable. If you have a variable-rate mortgage, you may not be able to port it unless you first switch to a fixed-rate mortgage. This, however, is usually not a problem because most variable-rate mortgages come with a conversion clause. The conversion clause allows the borrower to convert to a fixed rate at any time free of cost.
Your New Property’s Purchase Price
Another scenario where porting a mortgage becomes a little complicated is when the new property’s purchase price is lower or higher than the value of your current home.
- Porting a mortgage to a less expensive house
If you are moving into a cheaper house, you will have to make a partial repayment of the debt, which invites a prepayment penalty. That said, some mortgage contracts include a prepayment privilege. It allows the borrower to prepay part of the loan — like 10% — without any penalty. If your mortgage contract comes with a prepayment privilege, then depending on its terms and how much of the loan you are prepaying and when, you may be able to reduce the prepayment charge or avoid it altogether.
If you are downsizing, porting your mortgage may make sense only if you will not be charged a prepayment penalty. With the prepayment fee often running into several thousands, it can negate whatever savings porting offers.
Another way to avoid prepaying part of your mortgage debt is by making a smaller down payment on the new house, but this may not be always possible.
- Porting to a more expensive house
When people switch homes, they usually move into a bigger, costlier property. If you are upgrading and need to borrow more money, the lender will likely approve the top-up loan at a different rate. In such a situation, you will be offered a blend and extend mortgage. That basically means the rate you are paying on the current mortgage and the rate you are approved for the additional loan will be blended into a rate that fall somewhere in between. Also, your mortgage term will be reset to its original term, which is usually five years.
Here is an example: Let us assume you currently owe $220,000 on your mortgage and the rate of interest is 2.1%. Two years into your mortgage, you want to move into a more expensive house, for which you need an additional loan of $80,000. The best rate that your lender is willing to offer you for the top-up loan is 2.8%. That means if you port your mortgage, you will pay a blended rate that will be between 2.1% and 2.8% on the entire $300,000, and your mortgage term will be set to five years.
Porting is like reapplying for the mortgage that you already have. As such, the lender will submit you to a background screening, which will be particularly thorough if you want to borrow more money. Just because you were approved the first time does not mean you will be approved again.
The lender will look at your current income and credit score, among other things. If your financial situation has changed for the worse, the lender may turn down your request. For example, if you are earning less money, or if your credit score has taken a hit, the lender may not allow you to port your mortgage. Likewise, if you have been late at paying some of the monthly mortgage installments, your request may be blocked. Alternatively, the lender may not approve you for an additional loan if you have already borrowed the maximum amount the lender is willing to lend you.
How to port a mortgage?
The first step is to call your mortgage broker. The mortgage broker will review your mortgage contract and tell you if it is portable or not. If it is, the mortgage broker will help you understand the cost of exiting your mortgage contract and whether porting or breaking your mortgage is more profitable.
Once you decide to port, you will need to submit an application to the lender. Your mortgage lender will submit you to a detailed background screening, similar to the one that you had gone through the first time you applied for a mortgage. Based on their finding, the lender will inform you about their decision in writing.
The Benefits and Drawbacks of Porting a Mortgage
Porting a mortgage has many advantages, but there are some drawbacks as well. To be able to reach an informed decision, you should be aware of both.
If you got a great deal on your mortgage, porting it ensures you will not lose it. Even if you need a top-up loan, blending the current market rate with your original mortgage rate into a new rate may result in substantial savings.
Porting your mortgage also means you will not have to pay a prepayment charge, which can be as much as 2% of the mortgage balance during the first couple of years. Another advantage is that you will be able to avoid all the hassles of applying for a new loan.
First of all, not all mortgage contracts are portable. Even if your mortgage is portable, there is no guarantee that the insurer will agree to it. Also, it is possible that other lenders may be willing to offer you better terms or rates than your current lender.
If you are downsizing, porting may not be best option, as you may have to pay a sizeable pre-payment fee. Lastly, lenders give only a short time — usually between 30 and 120 days — to complete the port. It may prove difficult to buy a new house and sell the current one within such a short period.
Is Porting a Mortgage Always More Profitable Than Breaking a Mortgage?
Porting a mortgage has many benefits, but it is not the right choice in every situation. You should consider transferring your mortgage instead of taking out a new loan if the current market mortgage rates are higher than your mortgage rate. By porting, you will be able to hang on to your low interest rate and reduce your monthly mortgage installment. The other benefit is that you will not have to pay a prepayment charge.
However, if the current market rates are the same as or lower than your mortgage rate, porting is pointless. Transferring your mortgage may also not be a good choice if you are downsizing, since you will be charged a penalty for prepaying part of your debt.
Porting a mortgage means transferring the existing mortgage term and interest rate to a new property. Porting helps you sidestep the prepayment penalty and save a considerable amount each month if your existing rate is lower than the current interest rate for mortgages. Generally, porting a mortgage makes more sense when your new property’s value is the same as or higher than your current home’s value. If you are downsizing your home, you will prepay a portion of the mortgage debt and invite a prepayment penalty in return, which makes porting pointless.
Frequently Asked Questions
Is Porting Your Mortgage Worth It?
Porting your mortgage is a cost-saving strategy when your mortgage rate is lower than the current market rates. Holding on to the great deal that you got earlier could save you thousands of dollars in interest cost alone. Porting also allows you to sidestep the prepayment penalty, which can be as high as 2% of the loan amount in the initial couple of years.
However, if the current market rates are lower than or the same as your existing mortgage rate, porting is not worth the trouble. It may also not be a good option if you have to prepay part of the loan — something which is likely to happen when you downsize — and you will incur a penalty because of the prepayment.
What is a Blend-and-Extend Mortgage?
If you are moving into a more expensive house, you may need a bigger mortgage than you currently have. One option is to break the current mortgage contract, pay a prepayment penalty, and take out a new loan, either from the same lender or a new one. Another option is to take a blend-and-extend mortgage, which is essentially porting your mortgage with a twist. Your lender will combine your existing mortgage rate with the current market rate to set a rate somewhere between the two. And since your mortgage is not prepaid, you will not be charged a prepayment penalty.
Do you have to re-qualify to port a mortgage?
Yes, you do. Porting is a useful additional feature in a mortgage contract, but it does not come with a guarantee. When you apply for porting, you are basically reapplying for the mortgage. The lender can reject your request to port the mortgage if it thinks your financial situation has worsened, or if you have a history of late mortgage payments.
Can I port my mortgage if I am unemployed?
When you submit an application to port your mortgage, the lender will submit you to a detailed background scrutiny. If you are recently unemployed, chances are your application will be rejected. However, that does not mean porting is entirely impossible in your situation. Consider speaking to an experienced mortgage broker, who will walk you through all the options available to you.
How many days you have to port a mortgage?
Different lenders may have different time-limits for porting a mortgage. Some require you to buy a new property and sell the old one within 30 days; others may give you up to 120 days to complete the port.