With housing prices reaching new highs in recent years, affordability poses an increasing challenge – especially for first-time homebuyers in Canada. In this environment, Canadians 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 comprehensive guide examines everything you need about assumable mortgages in Canada today. It outlines the pros and cons for buyers and sellers, the qualification criteria, and the types of mortgages that can be assumed.
Let’s examine the key considerations surrounding assumable mortgages in today’s housing market.
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.
While terms vary, fixed-rate mortgages are generally assumed more often than variable-rate mortgages or home equity lines of credit (HELOCs) in Canada.
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 typically assumable, but variable-rate mortgages and HELOCs are generally not.
- 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.
Pros and Cons of Assumable Mortgage
Assumable mortgage has unique advantages and disadvantages for home buyers and sellers.
Benefits for Home Buyers
- Lower interest rate – The key benefit is getting a lower rate locked in by the seller, compared to current higher rates for new mortgages. This substantially reduces mortgage costs over the term.
- Avoid mortgage fees – Skipping a new mortgage application can avoid appraisal, legal, and lending costs of $1,500 to $4,000.
- Faster approval – Assuming an existing mortgage can be faster than getting approved for a new mortgage. This allows buyers to take advantage of time-limited offers more easily.
- Lower qualifying payment – Since buyers qualify based on the lower assumed rate vs. today’s rates, qualifying for a larger mortgage loan amount is possible.
Drawbacks for Home Buyers
- Bigger down payment – If the mortgage balance is less than the home price, the buyer must bridge the gap with a larger down payment.
- Liability – The buyer may still be liable for defaults during the term, reducing financial flexibility.
- Restricted terms – The buyer is limited to the original mortgage terms, such as the amortization period and prepayment options.
- No portability – Assumed mortgages usually cannot be transferred to a new property in the future.
Benefits for Home Sellers
- Avoid penalties – Sellers can sidestep prepayment penalties that often apply if they break a mortgage before maturity, saving thousands in penalty costs.
- Close faster – Assumption can facilitate quicker sales, which suits sellers needing a fast close.
- Attract more buyers – Offering assumption terms can make a listing more appealing and attract more interested buyers in competitive markets.
- Higher price – Buyers may be willing to pay more for a home if they can assume lower interest payments.
Drawbacks for Home Sellers
- Ongoing liability – If the buyer defaults, the seller could still be responsible for mortgage payments.
- No clean break – With ongoing liability, the seller is not fully free of the mortgage until maturity or buyer payments satisfy the lender.
- Risk of foreclosure – If the new owner causes the home to default or foreclose, it could impact the original homeowner.
- Extra fees – The lender may charge assignment or transfer fees, reducing seller proceeds.
Weighing the pros and cons allows buyers and sellers to determine if an assumable mortgage aligns with their needs and financial objectives. Consult a mortgage specialist for guidance.
How to Qualify for an Assumable Mortgage in Canada?
While criteria vary slightly by lender, buyers looking to assume an existing Canadian mortgage typically need to meet requirements like:
- Credit score: Most prime lenders (such as banks and credit unions) require a minimum credit score of 650, but some B-lenders/ alternative lenders accept scores as low as 500. However, they may charge higher interest rates and larger down payments.
- Down payment: The minimum down payment on assumed mortgages usually ranges from 5% to 20%, depending on factors like the purchase price.
- Debt ratios: Current standards require GDS and TDS ratios less than 39% and 44%. However, ratios up to 50% may be accepted.
- Minimum income: The lender usually determines the minimum household income requirement. Gross income often needs to be at least $60,000 to $80,000.
- Mortgage stress test: Federally regulated lenders must pass the mortgage stress test at the benchmark 5.25% rate or qualifying rate plus 2%, whichever is higher.
- Proof of income and assets: Recent pay stubs, tax records, bank statements, etc., must be accompanied by documented proof of income and assets.
(Source: https://rocketmortgage.ca/learning-centre/mortgage-basics/what-is-an-assumable-mortgage/)
Based on these details, the lender will evaluate the buyer’s ability to repay the mortgage commitment. Working with an experienced mortgage broker can help buyers navigate qualification requirements.
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:
- The purchase price of the home
- The remaining principal balance of the assumed mortgage
If the mortgage balance exceeds the price of the home, the seller may provide cash back to the buyer equal to the difference. This lowers the needed down payment to $0 in some rare cases.
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
So, 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.
Mortgage Assumption Process in Canada
Completing a mortgage assumption in Canada involves a series of key steps for buyers and sellers:
- Review mortgage terms – The seller must review their contract to confirm assumability terms and conditions.
- Conditional offer – A conditional offer to purchase can be submitted, contingent on the buyer qualifying to assume the mortgage.
- Apply to assume – The buyer formally applies to the lender for approval to assume the mortgage.
- Lender approves buyer – The lending institution will evaluate the buyer’s financial situation and creditworthiness.
- Down payment deposited – The buyer deposits the down payment, covering any gap between the mortgage balance and home price.
- Legal fees paid – Any lender or legal fees related to assigning the mortgage to the buyer are paid.
- Closing & transfer – The standard closing process is completed to transfer the title and legally assign the mortgage.
- Buyer takes over payments – The buyer becomes responsible for making all remaining mortgage payments and related housing costs.
- Seller liability expires – After 12 months of on-time payments by the buyer, the seller is usually released from any default liability.
While timeframes vary, the assumption procedure usually takes 45 to 60 days in Canada. Proper coordination between realtors, lenders, lawyers, and buyers/sellers is crucial for smooth execution.
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 over 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.
Read more: Porting a Mortgage in Canada
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. This discount on interest costs is often the biggest benefit.
- 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. This increased purchasing power improves affordability.
- 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. This allows buyers to jump on opportunities in competitive markets.
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 sale of the home 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 rates and the assumable rate 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 make an informed decision to optimize sale value/speed.
Weighing the following factors helps determine if assuming an existing mortgage makes sense:
- Will you qualify based on credit score, income, debt levels, and down payment funds? Do you meet the lender’s approval criteria?
- How much interest and total costs will you save over your ownership period compared to current market rates?
- Are you comfortable with the risks like being liable for the seller’s default, limited prepayment flexibility, and restrictions on portability?
- Does the difference between the purchase price and mortgage balance fit your down payment capabilities?
- Does the mortgage term, amortization, and other details properly fit your plans and future needs?
- Are you willing to go through the extra steps of the assumption process versus a regular mortgage approval?
Carefully projecting the financial impact, risks, and benefits that come with assumption helps determine if it is the most strategic move. Consulting an experienced mortgage professional provides guidance.
Navigate Assumable Mortgage
With extensive mortgage knowledge and lending connections, a broker can advise whether assumption makes good financial sense for your situation. Key services a broker provides include:
- Reviewing if your mortgage is assumable before listing your home for sale
- Helping buyers evaluate the pros/cons and qualifying steps to assume a mortgage
- Guiding you through the application and approval process
- Coordinating details between lenders, lawyers and real estate agents
- Exploring alternative options if assumption is not feasible
- Ensuring proper documentation and timelines are followed
- Getting access to exclusive mortgage rates and assumable loans from lenders
Given the complexities of assumable mortgages, having an expert broker represent your interests saves time, money, and headaches. They work to secure the optimal terms and mortgage structure tailored to your needs.
Conclusion
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 experienced brokers provides essential guidance to navigate assumable mortgage in Canada. We customize the ideal mortgage solution whether you are looking to assume, get pre-approved for a new mortgage, port an existing mortgage, or pursue other options.
With in-depth knowledge of today’s housing market and access to Canada’s top lenders, we negotiate the optimal terms for your unique financial situation.
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.
FAQs
How does an assumable mortgage work in Canada?
The buyer takes over the remaining mortgage balance, term, interest rate, etc., from the seller after being approved by the lender. The buyer must qualify and make the remaining payments.
What are the benefits of assuming a mortgage in Canada?
Lower interest rate, avoiding new mortgage fees, faster approval, increased buying power with lower qualifying rate.
What are the risks of assuming a mortgage in Canada?
ou need a larger down payment, be liable if the new owner defaults, stuck with the original inflexible terms, and there is no portability.
What types of mortgages can be assumed in Canada?
Fixed-rate mortgages are commonly assumable, while variable rates and HELOCs typically cannot be.
How much down payment is needed to assume a mortgage in Canada?
The buyer must pay the difference between the purchase price and the mortgage balance, which could be 20% or more.
What is the process to assume a mortgage in Canada?
Review terms, get a conditional offer, apply and get approved, provide down payment, legal transfer, and begin payments.
What if I don't qualify to assume a mortgage in Canada?
Alternatives are porting your mortgage, using an alternative lender, or rent-to-own agreements.
How can I avoid liability by assuming my mortgage is in Canada?
Liability often expires after 12 months of on-time payments by the new owner.
How can I determine if my mortgage can be assumed in Canada?
eview your original mortgage terms and commitment letter or ask your lender directly.
Should I work with a broker for an assumable mortgage in Canada?
Yes, brokers guide you through the complex process and options and negotiate ideal terms.
