Understand The Difference Between Portable Mortgages & Assumable Mortgages
Don’t know the difference between a portable and assumable mortgage? This blog has got it all covered. Read on to find out more.
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Explain the Difference Between Portable Mortgages and Assumable Mortgages. Are you a prospective homebuyer? Do you wish to know about the several mortgages for your new house? Here, we offer a comprehensive guide about portable and assumable mortgages.
What Is an Assumable Mortgage in Simple Terms?
Getting mortgage loans is difficult. The initial discussions, pre-approval exercises, and getting final sanctions are lengthy processes. It prompts several homebuyers to search for alternatives to help them bypass the mortgage approval process.
An assumable mortgage is one of such alternatives, allowing the homebuyers to buy a mortgaged house by taking over the existing mortgage loan and current mortgage terms.
Apart from gaining protection from the hassles of securing a mortgage, it also helps homebuyers take advantage of the lower interest rates offered by the assumable mortgage.
Hence, under this arrangement:
- A new homebuyer can “assume” the debt of the previous owner without getting involved in a fresh mortgage process
- From now on, you will repay the outstanding balance of the mortgage loan assumed
- The mortgage rate, amortization period, and the monthly mortgage payments will remain the same
How Does an ‘Assumable Mortgage’ Work?
Let us understand this concept through a practical example.
Alex is a self-employed individual and runs his shop in Brampton. Presently, he lives in Caledon, and to reduce his time spent daily commuting, Alex wishes to buy residential accommodation in Brampton itself.
He searched for a few properties offering the option of assumable mortgage and has a specific interest in a dwelling having the following attributes:
| Asking Price of the property | $500,000 |
| Outstanding mortgage loan | $388,000 |
| Mortgage rate | 4.25% per annum |
| Amortization period | 25 years |
| Balance amortization period | 19 years |
| Monthly Mortgage Payments | $2,709 |
If Alex wishes to buy out this property under an assumable mortgage, then:
- He will get the mortgage loan of $388,000. He needs to make a monthly mortgage payment of $2,709 for the rest of the amortization period, 19 years.
- Alex will be required to pay the difference between the Asking Price ($500,000) and the Outstanding Mortgage Loan ($388,000) to the seller of the property upfront via his funds or by securing a loan.
What Is a Portable Mortgage in Simple Terms?
It is common among homebuyers to migrate from one property to another based on their convenience, interest, and objectives. However, they will need to break their mortgage and pay their lender a penalty.
To save a homebuyer from this forced monetary outgo, the concept of portable mortgages came into existence. With this facility, you can transfer your mortgage from your existing house/property to your new house/property without breaking your mortgage.
How Does a ‘Portable Mortgage’ Work?
Let us understand this concept with the help of a practical example.
- Emma is a working professional, and such is the nature of her job that she is required to move after every 2-3 years based on her job requirements.
- Currently, she is living in Oakville and expects in the next few months to Mississauga.
- She started searching for residential homes there and instantly got attracted to a property on Windjammer Road, Mississauga, that is available for an asking price of $450,000
- Presently, she is staying on a mortgaged property in Oakville that has the following attributes:
| Fair market value | $420,000 |
| Monthly mortgage payments | $2,159 |
| Outstanding Mortgage Loan Balance | $268,000 |
| Mortgage rate | 3.75% |
| Amortization period | 25 years |
| Balance amortization period | 18 years |
- By exercising the option of Portable Mortgages, Emma will move to her new house by:
- Selling her existing property in Oakville
- Buying her new property in Mississauga using the sale proceeds of the Oakville property
- Arranging funds to compensate for the fall of $30,000 ($450,000 – $420,000)
- Keep paying her monthly mortgage payment of $2,159 for the rest of the amortization period, which is 18 years
Emma’s lender will free her Oakville property from any charge/ right and establish the same over her Mississauga property.
So under this arrangement, all the mortgage terms and conditions remain the same, and only the mortgaged property changes.
Can You Differentiate Between Portable Mortgages and Assumable Mortgages?
To give you maximum clarity, we have prepared a list of some of the key differences between these mortgage options:
| Parameters of Difference | Portable Mortgages | Assumable Mortgages |
| Meaning | You port or transfer your mortgage from your existing property to a new property | You assume the outstanding mortgage debt of the seller of the property |
| Mortgage Terms and Conditions | Remaining the same, you need to pay the monthly mortgage payments you were paying earlier | Remaining the same, you need to pay the monthly mortgage payments paid by the previous owner. |
| Mortgage Property | Changes, your lenders will create a conditional right over your new property and your existing property will become free | Does not change, the lenders continue to have a conditional right over the property which you have bought under this arrangement |
| Triggering Event | Sale of your existing mortgaged property and purchase of a new property | Purchase of a new mortgaged property |
| Benefits | 1. It saves you from penalties incurred upon breaking the mortgage 2. It helps you to enjoy your existing low mortgage rates and other privileges 3. It prevents you from the inconvenience of closing your standing mortgage and applying for a new one | 1. Creates demand for the property and makes it more attractive to buy, helping the sellers to get a fair price 2. Enables the buyers to enjoy the benefits of a lower mortgage rate, especially beneficial during an upward trend 3. It saves you from the hassles of securing a new mortgage loan |
