Yep, I know… I know I’m guilty as charged! It’s been a few months since my last blog post and readers have been wondering, Stevie, where ya been?! Well, around 10,500km away to be exact! I did a bit of traveling this year to recharge and now I’m back and ready to catchup where we left off!
Over the weekend, I got an email from a former client, let’s call her Elena. Here’s how the story unfolds…
Elena and her hubby bought a beautiful, semi-detached home for their growing family out in the city’s west end. I believe it was around this time last year, a month or two shy…
The financing on the home was a closed, 5 year fixed rate mortgage. Unfortunately, a few months after taking ownership and enjoying their new home, some personal health circumstances changed affecting the couple’s ability to maintain their current lifestyle and financial commitments. They needed to sell and sell right away. Ok, no problem.
- Home is in a high demand neighborhood
- There are no shortage of buyers willing to come forward
- Prices have gone up since the couple’s purchase
- It’s been less than a year since obtaining a fixed rate mortgage
- They are not porting the mortgage to another home so prepayment penalties will apply
- Interest Rate Differential method is used to calculate penalties here, amounting to $25K+
“Stevie, is there anything we can do? We got a great rate going in and of course had no plans on selling or to moving in the near future. The penalty though, on top of our other commitments is very hard to swallow. Any ideas on our options?”
Hey Elena, have you heard of what’s called an “assumable” mortgage? Yes…no… maybe? Okay let’s pretend you don’t and start from the beginning.
An assumable mortgage allows a buyer to take over the existing mortgage on your home.
In most cases, the lender has to give the green light on both the transfer and the buyer who wants to assume the mortgage.
If approved, the purchaser will take over the remaining payments and becomes legally responsible for the mortgage terms.
In some provinces, the seller may remain liable for the mortgage after it has been assumed by the buyer. That said, many lenders will often agree to release the seller from any personal liability if the buyer meets their qualifications.
The good thing, Elena, is that most fixed-rate mortgages (including yours) can be assumed, but variable-rate mortgages and home equity lines of credit cannot. The terms of the original mortgage must stay the same of course.
(Quick Fact) Often your mortgage agreement should also show if an “assumption” fee applies to complete the transfer.
An assumable mortgage could also be a pretty cool option for your buyer if interest rates have gone up since the mortgage was first taken out. The buyer could take advantage of a relatively low interest rate compared current rates.
“But what if our market value has gone up and the mortgage balance to be assumed isn’t enough to pay for the property?
Easy like Sunday morning… If the buyer needs to borrow more funds in order to pay the market value, as long as they qualify, he or she may be able to apply for a higher amount with the lender.
IF on the other hand, the buyer needs less than the outstanding mortgage balance, then you will have to pay off the difference. In this case, you will incur the prepayment charge, but rest assured, it would be on a lesser amount so your penalty would be far, far less.
Just one last thing Elena, keep in mind that not every buyer is gonna want to pursue this option. Some buyers might have preferences to work with specific lenders while others might already have great rates through their mortgage broker.
Under this circumstance, because we are currently in a seller’s market, we could make it a condition of the sale that the mortgage has to be assumed by the buyer. An aggressive buyer who wants to land a home and avoid competing with other multiple offers, might be more willing to accept this condition. Hence, a win-win for everyone involved! Hope this helps!