Assumable Mortgage in Canada: Maximize your Savings

With housing prices reaching new highs in recent years, affordability poses an increasing challenge – especially for first-time homebuyers. Canadians are seeking ways to enter the housing market with lower costs by assuming the seller’s existing mortgage, which provides significant savings.

However, qualifying for and assuming an existing mortgage is more complex than getting a new one. This guide examines everything you need about assumable mortgages in Canada today.

What is Assumable Mortgage?

An assumable mortgage refers to an existing mortgage loan held by the home seller that can be transferred to the buyer. This allows the buyer to take over the remainder of the mortgage with the same loan terms, interest rate, payment schedule, etc.

The buyer becomes responsible for the remaining mortgage payments and takes legal home ownership.

Key features of an assumable mortgage:

• An existing mortgage loan is transferred from sellers to buyers
• The buyer takes on the remainder of the mortgage balance, term, rate, etc.
• It prevents buyers from having to get a new mortgage
• Seller avoids prepayment penalties if they have time left on the term
• Must be approved by lenders for buyers to assume the loan

Not all mortgages are assumable – the ability to assume depends on the terms and conditions set out when the mortgage was initially established.

How Assumable Mortgage Works in Canada?

For a buyer to assume the seller’s mortgage, the process involves:

• Reviewing the mortgage terms: The seller’s documents must be reviewed to confirm that they are assumable. Key details must be verified, such as the interest rate, remaining amortization period, prepayment options, assumability clause, etc.
• Lender-approval: The prospective buyer must formally apply and be approved by the lender to assume the mortgage. The lender will evaluate the buyer’s creditworthiness, income, debts, down payment, etc.
• Down payment: If the mortgage balance is less than the home price, the buyer pays the difference as a down payment. If the mortgage exceeds the price, extra funds may be paid to the seller.
• Legal transfer: Standard real estate purchase agreements and conveyancing procedures are completed to transfer the title and the mortgage to the buyer legally.
• Ongoing liability: Sometimes, the original homeowner remains liable if the new owner defaults. However, liability often expires after 12 months of on-time payments.

Once approved, the buyer is responsible for all future mortgage payments and related costs, such as property taxes and home insurance.

What Type of Mortgages Can Be Assumed in Canada?

While assumptions are permitted, not every mortgage in Canada necessarily qualifies for assumption. The original mortgage terms must allow for the loan to be transferred to a new borrower.

According to mortgage experts, key mortgage features that determine a mortgage’s assumability include:

• Term – Fixed-rate terms of 1-5 years are often assumable. Longer-term mortgages may be less likely to permit assumption.
• Type of interest rate – Fixed-rate mortgages are generally assumed more often than variable-rate mortgages or home equity lines of credit (HELOCs) in Canada.
• Lender – Major banks and lenders may be more likely to allow assumptions than smaller institutions. Credit unions, for example, may restrict assumptions.
• Original agreement – The initial mortgage contract must explicitly allow for assumption. There is often an assumability clause outlining the right to assume.

If you are unsure whether your mortgage can be assumed, check with your lender directly. Never presume your mortgage is assumable without verifying assumability upfront.

How Much Down Payment Needed to Assume a Mortgage in Canada?

The amount of down payment required when assuming a mortgage depends on two key factors:

1. The purchase price of the home
2. The remaining principal balance of the assumed mortgage

If the mortgage balance exceeds the price of the home, the seller may give the buyer cash back equal to the difference. In rare cases, this lowers the needed down payment to $0.

However, the remaining mortgage balance is often less than the home price. This requires the buyer to make up the difference in cash as their down payment.

For example:

• Home purchase price: $500,000
• Assumed mortgage balance: $350,000
• Down payment required = Purchase price – Mortgage balance = $500,000 – $350,000 = $150,000

In this case, the buyer would need a 27% down payment, significantly higher than the 5% minimum for typical mortgages in Canada.

The down payment amount can be a major restriction. Buyers must have enough cash savings or assets like a home equity line of credit to bridge the gap.

Alternatives to Assumable Mortgage in Canada

If an existing mortgage cannot be assumed, buyers have alternatives such as:

• Port an existing mortgage – Buyers can sometimes port the mortgage from their current home to the new property. This also transfers the interest rate and terms.
• Get pre-approved – Being pre-approved for a new mortgage allows buyers to move swiftly when bidding on homes. Rates will be higher than existing mortgages but give more flexibility.
• Alternative lenders – If buyers don’t qualify with standard lenders, alternative or private lenders provide mortgage options at higher rates.
• Rent-to-own – Rather than purchase a home, some buyers opt for a rent-to-own arrangement to lock in future ownership at set terms.

Evaluating all available mortgage options with a broker ensures home buyers find the most advantageous solution for their financial situation.

When Does Assumable Mortgage Make Sense?

Assuming an existing mortgage tends to be most beneficial for buyers and sellers in certain situations.

For Home Buyers

Mortgage assumption can make the most financial sense for buyers when:

• Current mortgage rates are much higher than the assumable rate: For example, if current rates are 5-6% and the assumable rate is 2-3%, 2-4% savings over five years can add up to tens of thousands of dollars.
• The buyer plans to stay in the home long enough to realize savings: If the buyer only lives in the home for 2-3 years but assumed a 5-year term, they may not benefit as much versus getting a new competitive 2-3 year mortgage. Maximizing the savings requires staying home for most or all of the term.
• The buyer has enough funds to cover a potentially larger down payment: Assumptions require paying any gap between the purchase price and mortgage balance, which could mean a 20 to 30% down payment. If needed, the buyer must have liquid funds available for this bigger upfront payment.
• The buyer wants to maximize affordability by qualifying at a lower rate: Qualifying based on the assumed lower rate vs. current higher rates allows approval for a larger overall mortgage amount, increasing purchasing power.
• The buyer needs quick financing to capitalize on a time-limited offer: Assuming an existing mortgage can provide faster approval than a new mortgage application, allowing buyers to jump on opportunities in competitive markets.

There are 4 drawbacks of Assumable mortgage for home buyers

1. Bigger down payment – If the mortgage balance is less than the home price, the buyer must bridge the gap with a larger down payment.
2. Liability – The buyer may still be liable for defaults during the term, reducing financial flexibility.
3. Restricted terms – The buyer is limited to the original mortgage terms, such as the amortization period and prepayment options.
4. No portability – Assumed mortgages usually cannot be transferred to a new property in the future.

For Home Sellers

Meanwhile, sellers may benefit most from an assumable mortgage when:

• They want to avoid prepayment penalties for breaking their mortgage early: Assumption means transferring the mortgage instead of paying it off, helping avoid penalties of thousands of dollars.
• They need to expedite the home’s sale within a short timeline: Offering assumption terms can attract more buyers and lead to a quicker sale when required.
• Current mortgage rates are substantially higher than their locked-in rate: A larger gap between current and assumable rates creates more appeal for potential buyers.
• Local housing supply is low, and markets are competitive: When buyers are bidding on limited listings, assumption terms can set their offer apart.
• They are comfortable with risks like lingering liability: If the seller understands the risks, they can decide to optimize sale value/speed.

Also, consider these 4 cons for Home sellers:

1. Ongoing liability – If the buyer defaults, the seller could still be responsible for mortgage payments.
2. No clean break – With ongoing liability, the seller is not fully free of the mortgage until maturity or buyer payments satisfy the lender.
3. Risk of foreclosure – If the new owner causes the home to default or foreclose, it could impact the original homeowner.
4. Extra fees – The lender may charge assignment or transfer fees, reducing seller proceeds.

Weighing the pros and cons allows buyers and sellers to determine whether an assumable mortgage is appropriate for their needs and financial objectives.

Assumable Mortgage FAQs

For eligible buyers and sellers, assuming an existing mortgage can be financially advantageous in today’s rising rate environment. However, qualifying criteria, legal obligations, fees, and processes make it more complex than obtaining a standard new mortgage.

At Best Mortgage Online, our brokers provide essential guidance to navigate assumable mortgages in Canada. Don’t assume your mortgage without consulting a professional first. We are ready to help you maximize affordability, savings, and peace of mind on your path to homeownership.

Article Sources

1. Assumable Mortgage: What It Is, How It Works, Types, Pros and Cons, investopedia