An assumable mortgage is an arrangement in which an outstanding mortgage can be transferred from the current owner to a buyer. Assumable mortgages are specialized financing options that typically work for a small percentage of borrowers in very limited circumstances. Whether you’ve already considered the option or haven’t yet been exposed to the suggestion, the first step to determining if it’s the right fit for you, is to learn more about how it works.
What Types Of Loans Can Be Assumed
Assumable mortgages are not very common in Canada. Most fixed-rate mortgages can be assumed, while variable-rate and home equity lines of credit cannot.
Pros And Cons Of Assumable Mortgages
As with any financial decision, it’s always wise to weigh out the pros and cons so you can determine if an assumable mortgage is the best fit for you.
Pros
If you’re the seller and you’re willing to have someone assume your mortgage, then you may be able to get a better price for your home and could wind up with a very different selection of potential buyers. If you’re looking to downsize but you still have several years left on your term, you can also avoid the prepayment fees with this process.
If you’re the buyer, when current interest rates are higher than an existing mortgage’s rate, assuming a loan could very much be in your favour. There are also a lot fewer costs for buyers to pay at closing in comparison to applying for your own mortgage. You won’t need to secure new financing and you won’t have any large out-of-pocket expenses if the equity is low.
Cons
If you’re the buyer and the seller has a significant amount of equity built up in the home, you will either have to make a large down payment or secure a second mortgage for the balance not being covered by the existing mortgage. This could pose a problem if the two lenders don’t cooperate with each other. Having two loans also increases the likelihood of default.
If you’re the seller, you’ll want to be aware that if the new borrower defaults on the loan, the lender can come after the original borrower in order to get their money back. If the new borrower hasn’t taken good care of the home and has negatively impacted its resale value, this could be a serious problem. If the home can’t be sold for enough money to pay back the mortgage, the original borrower could be on the hook for the difference in value. As the seller in this situation, the major con to allowing a buyer to assume your mortgage is that you could still be pulled back into the equation if the new borrower isn’t able to meet their obligations. If you’re concerned about this aspect of the transition, it’s advised to speak with your lender about having them approve a release request which releases you (as the seller) of all liabilities from the loan.
How To Assume A Mortgage
An assumable mortgage allows a buyer to assume the current principal balance, interest rate, repayment period and any other contractual terms of the seller’s mortgage. Rather than going through the rigorous process of obtaining a home loan from the bank, a buyer can take over an existing mortgage.
In order to assume a mortgage in this way, the buyer must first qualify with the lender. If the price of the home exceeds the remaining mortgage, the buyer must provide a down payment for the difference between the two. If the difference ends up being substantial, there’s a chance that the buyer may need to secure a second mortgage.
The final decision in regard to whether an assumable mortgage can be transferred isn’t left up to the buyer and seller. The lender of the original mortgage must approve the mortgage assumption before either the buyer or seller can sign off on it. As part of this process, the new home buyer must apply for the assumable loan and meet the lender’s requirements (i.e. debt-to-income ratio, credit score, sufficient assets etc.).
Assumable mortgages may not be very common, but they are still a potential option for Canadian home buyers and sellers. If you’ve spoken to your lender, asked all the necessary questions and the benefits outweigh the risks, an assumable mortgage may be the best option for you as a buyer or a seller. Interested in learning more? Get in touch with our team of mortgage experts to kickstart the conversation.