Mortgage options when buying and selling
Updated: Jan 14, 2022
Break, or port? Port and blend? Blend and extend? All explained here.
TL;DR: you can pay to break the mortgage and take a new one, or take your old mortgage with you and add new money (or pay some back) if you need to. Not every mortgage will allow every option listed below. Interest rate levels, mortgage features, and lending and qualifying guidelines will determine which option is the most cost effective and desirable for you.
If you are selling your home and buying another one, chances are the closing dates of your purchase and sale transactions will not line up with the end of your existing mortgage term. It is for this reason we recommend including a portability option in your mortgage. This feature allows you to keep the existing mortgage amount and interest rate for the rest of the mortgage term. It is nearly certain there will be a difference in price, and either money coming back or additional money that needs to be put down on the new place. The mortgage amount is unlikely to be the same as what the original mortgage was.
If the new mortgage will be smaller
Keep the existing mortgage and pay it down with sale proceeds
In a situation where the new mortgage amount will be lower than the original mortgage, it may be advisable to keep the existing mortgage intact and pay it down using the money from the sale. The new lower mortgage amount will be ported to the new property. The total amount of the mortgage must always be no more than 95% of the value of the new property, so even if the mortgage is being paid down, there still has to be a down payment made. Any reduction in the amount of the mortgage will be counted as a prepayment and will have to be within the prepayment guidelines of the mortgage. If the reduction in the mortgage amount is more than the allowed prepayment amount, a charge may apply.
Mortgage payment amounts will NOT change - they will continue to be based on the original mortgage amount and amortization from the beginning of the term. Payment amounts will adjust to the new lower amount at the end of the term, which is also when the interest rate will be set for a new term.
Break the existing mortgage and take a new one
There are some situations where the total cost of borrowing is lower, or where it may be desirable, for a borrower to break the existing mortgage, pay the penalty, and take a brand new mortgage.
Mortgage interest rates may be lower at the time of a purchase and sale transaction. If this is the case, we will calculate the amount of the prepayment penalty, and determine if the new lower interest rate will be enough to cover the penalty charge.
For example, if the penalty charge is $1,200, but a new mortgage saves $40/month interest for 5 years ($2,400 in savings) it would make sense to take a new mortgage. The lower rate will result in a lower payment and lower interest expenses. The ability to take a new 25 year amortization period will also reduce payments, but will increase the total cost of borrowing over time compared to a shorter amortization.
For some borrowers it may still be desirable to take a brand new mortgage, even if the penalty amount is not fully recovered. The only way to have the payment reduced to reflect the lower mortgage is to take a new mortgage and amortization period. If the purpose of the property downsize/change, and reduction in mortgage, was to improve the monthly household budget, a new mortgage might make sense.
If the new mortgage will be bigger
Blend the current mortgage, interest rate, and remaining term with new money
A blended mortgage is essentially two mortgage rates combined into one. This option can work out to be a lower cost of borrowing because no penalty charge applies. In addition, if the existing mortgage interest rate is very low compared to current rates, and there is a lot of time left on the current term, a blended rate can be the most cost effective option. On the other hand, if there is not much time left on the current term, or the new money is significantly more than the existing mortgage, a blended rate may be more expensive overall. It might make more sense to break the mortgage. This can also happen because the "blend rate" - the rate of interest charged on the new money - will not be the best rates on offer. The "posted" or un-discounted rate is usually what is used, and the end result can be a blended rate that is actually higher than whatever the current interest rate market may have to offer.
One of two types of blended rate options are available:
Blend to term: With a blend to term, the time left on the mortgage is kept intact. If there are 2 years remaining of a 5 year term, any new money will be added to the mortgage for the rest of the term, in this case 2 years. A simple average of the old mortgage amount and rate, and the new money and rate, will produce the blended interest rate. The time remaining on the original mortgage is not factored in, and the mortgage will renew on the old schedule.
Blend and extend: In addition to the amounts of old and new money and the interest rates, the amount of time left on the old mortgage term is factored in to the calculation.
As an example, if the existing mortgage is $300,000 at 2.5% and there are 2 years left, and the new mortgage amount will be $400,000 for a new term of 5 years with new money charged 3% interest, then the blend calculation will take this all into account to produce one interest rate, for a new term of 5 years.
Break the existing mortgage and take a new one
Similar to the scenario where the mortgage amount will be lower (above), it might be worthwhile to break the mortgage. Lower monthly payments, lower interest expenses, and lower total cost of borrowing may all be achievable by paying the penalty charge.
In some cases, it may be required to take a new mortgage. If the new blended payment and rate are based on an amortization of 20 years, for example, the payment will be higher than a 25 year amortization. The 25 year payment may qualify, while the 20 year payment may not.