You are now 3 years into your 5-year fixed mortgage. Your family is growing and your current home no longer suits your needs. You’ve found a new home that would be perfect for you and your family! So what do you do with your mortgage?
You’ve checked with your current lender and found out that there is a hefty penalty to break the mortgage. Porting the mortgage over can turn a penalty of several thousand dollars into zero.
So since you will save thousands on the penalty, porting is the way to go, right? Some people are absolutely terrified of the word penalty and will do anything to avoid it. But avoiding the penalty doesn’t always mean you’ll be saving more money.
First, let’s take a look at what porting actually means, and then we can get into the fun stuff.
What is porting?
Porting is basically transferring (or porting) your current mortgage from a property you are selling to a one you are buying. Let’s say you owe $300,000 on your current mortgage and have 2 years remaining. You need to borrow an additional $200,000 to make your new home purchase a reality. You would port over the existing $300,000 mortgage and would continue with your current rate on this amount until the end of your term. The extra $200,000 you need would be at the rate at the time you submit your mortgage application. The two are then blended together for a single rate and payment.
For example, if you are paying 2.99% on your current $300,000, and the going rate is now 3.64%, you would continue paying the 2.99% on the $300K for the remaining two years. The $200,000 of new money would be charged at the 3.64%. At the end of the remaining 2 years of your original mortgage, you would then be paying 3.64% on the entire amount for the remaining 3 years of the mortgage. This would all be blended together into a single rate and payment. Your lender will provide you with the new, blended rate at the time of approval. You would end up with an obscure rate such as 3.476%, and this would be the rate on the new mortgage.
Porting a variable rate mortgage
When porting a variable rate mortgage, only the current balance can be ported over. It cannot be increased and blended as described above. That applies to fixed rate mortgages only. If you are considering porting your variable rate mortgage, and you need to increase your mortgage amount (which is almost always the case), then you would have no choice but to break your mortgage and pay the penalty. You would then get an entirely new mortgage for the entire amount needed. Another option would be to convert your variable rate into a fixed. You would then be able to increase your mortgage amount and do a blended rate, however this is not usually a strategy I suggest. It’s likely that there will be options at lower rates than what you would be offered when converting to a fixed rate. You would be better off to check what other rates are available to you first, and then your broker can do the math to determine which is the more cost-effective option for you.
Competitive rates when porting
When porting your mortgage, don’t expect a deal. The lender knows that it’s going to cost you money to leave, so they don’t need to be super competitive if they want to keep your business. What makes porting so attractive is that you save on your penalty. Plus, there is typically no cost involved with porting. In cases where you are faced with a particularly large penalty, porting can come across as a no-brainer. However, this isn’t always the case. Never assume that porting is the best course of action just because you save on the penalty. In some cases, it may make more sense for you to just pay your penalty and then take your mortgage to a new lender.
There are a few things you need to consider before you make your final decision:
- Rate you are paying on your original mortgage
- Amount owing on your original mortgage
- Time remaining on your original mortgage
- Amount of additional money required
- Rate on the additional funds required
For example, if you are paying 2.99% on your current mortgage of $300,000, and you have 6 months remaining. You need to borrow an additional $250,000, which you are being quoted 3.79% by your current lender. You need to keep in mind that the 2.99% rate you have right now will only be good for another 6 months. After that, you’ll be paying the 3.79% on the entire amount for the remaining 4.5 years. Your lender offers you a blended rate of 3.746%. You’re being offered at 3.39% 5-year fixed by another lender, but you would then have to pay a penalty of $2,542.50 (including discharge fee) to break your current mortgage.
This means that porting the mortgage would cost you an additional $5,885.73 compared with paying your penalty on your current mortgage and getting a new one at 3.39%.
Some people hear the word penalty, and they get scared. They will do anything avoid it. I’ve seen people commit to a mortgage costing them thousands more, just so they can save the penalty. (Yes, thousands more with the penalty already considered). In the case above, it would cost you $5,885 to save $2,542 on the penalty. You’d be amazed at how many would choose to save the penalty as the math was not outlined for them. This is why it is so crucial that you are choosing the right person to handle your mortgage for you. (Note that the $5,885 savings already has the penalty factored in).
Length of term
The term you are porting to must be equal or greater to the years remaining on your current term. For example, if you have 3 years remaining, you cannot port your mortgage into a 2-year term. The options would only be for 3 years or greater. This will suit the needs of most borrowers, however if you are looking for a shorter term of 1-2 years, your only option would be to break your current mortgage, and pay the penalty.
How long do I have to port?
If you have sold your home, but have not yet found a new one, you can still port your mortgage, however the clock is ticking. Most lenders will give you 90 days to port your mortgage after your home has been sold. Some lenders may give you as little as 30 days, while others might be as long as six months. You would pay the full penalty at the time of closing on your sale, but this would then be reimbursed to you once your new home purchase closes.
What to watch out for
Some lenders may not do blended mortgages and may just add a second component instead. It can sound great to a less savvy mortgage shopper, however this can be a costly course of action.
Let’s say you need to port your mortgage over and you have 3 years, 7 months remaining. You need an additional $200K. The lender adds a second component to your mortgage consisting of a 5-year term for the additional money you need while keeping your current term intact. No blended rate involved. Now you have two components to your mortgage, with two different maturity dates. This means that you will NEVER be able to get out of this mortgage without paying a penalty. If you have one mortgage maturing on June 1st, and then the other component doesn’t mature until September 17th of the following year, you’ll always have this misalignment. So you’ll always pay a penalty on one component or the other. Unless of course you see your mortgage through to completion with the same lender. This alone would likely be a costly choice.