If you want to up or downsize your home and are moving during your current mortgage cycle, keep a few things in mind. First, making any change to your mortgage during your mortgage term is considered “breaking” the mortgage.
Portability
If your mortgage is portable, moving up and scaling down will be much simpler. If you are unsure of the term, “porting” your mortgage refers to taking your existing mortgage (including your rates and terms) and transferring it from the original property to another. This can only be done if you’re purchasing a new property at the same time you’re selling your old one. However, unlike mortgage refinancing, porting does not require breaking your mortgage or paying penalties.
Consider The Penalties
Whenever you break your mortgage, there are penalties associated with that, as it is a contract. Depending on the type of mortgage you have (variable vs. fixed-rate) and how much time is left (1 year, two years, etc.) will determine the level of penalty. Typically, these are calculated in one of two ways:
Interest Rate Differential:
In Canada, there is no one-size-fits-all rule for calculating the Interest Rate Differential (IRD), and it can vary significantly from lender to lender. This is due to the various comparison rates that are used. However, typically the IRD is based on the following:
- The amount remaining on the loan
- The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today
Ideally, you should know your IRD penalty before breaking your mortgage, as it is not always the most viable option.
Three Months Interest:
Sometimes, the penalty for breaking your mortgage is equivalent to three months of interest. This penalty typically accompanies a variable-rate mortgage.
Re-Qualifying
If you are unable to port your mortgage, you would need to re-qualify for a new mortgage at the current rates offered by lenders and would be subject to government changes – including recent “stress test” rules.
If it has been a while since you bought your first home, you may be unfamiliar with the “stress test.” If you are purchasing a new home with a new mortgage, it is essential to understand this test, as it is a requirement to qualify.
The Stress Test was introduced in October 2016 for insured mortgages (down payments of less than 20%). Still, as of January 1, 2018, this includes all mortgages, regardless of the down payment percentage. This test determines whether a home buyer can afford their principal and interest payments should interest rates increase. It is based on the 5-year benchmark rate from the Bank of Canada or the customer’s mortgage interest rate plus 2% – whichever is higher.
Shopping for your next home? Let’s get you prepared. We can go over your options with your current mortgage, and decide what works best for you!
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Trish & The Primex Team