Why Borrowers should Pay Attention to Mortgage Portability as much as Rates

Lack of portability can financially trap people in homes in cases where they can’t afford or qualify for a new mortgage.

One thing that bites homeowners in the derrière is mortgage portability — or lack thereof.

Mortgage shoppers fixate so hard on shaving fractions off their interest rate that they totally overlook what else factors into their borrowing cost.

But in many cases, portability policies are an ambush waiting in the lender’s fine print. Here’s why:

Portability defined

Mortgage portability lets a homeowner transfer their existing mortgage from the property they’re selling to the one they’re buying. First, you hang onto the rate you already locked in. This was essential for people moving in 2022 and 2023, for example, when fixed mortgage rates launched 400 basis points.

Imagine planning your move, only to discover your mortgage won’t follow you, so you’re suddenly signing up for double or triple the interest rate you were paying. Plenty of borrowers were blindsided because their discounted deal of a lifetime turned out to be unportable.

For the same sized mortgage, some watched their payments jump by up to 50 per cent. Worse, many had to break their closed mortgages altogether. That requires a prepayment penalty, which can easily be in the thousands or tens of thousands of dollars.

By contrast, some people negotiate to the death to save 0.1 percentage point on their interest rate, which amounts to just $1,429 over five years on a standard $300,000 mortgage (roughly the average mortgage size in Canada). That’s a big potential cost tradeoff, yet folks routinely underestimate their odds of moving and the price they’ll pay without portability.

I saw this up close before I sold my mortgage company. We had a website that let visitors filter lenders by feature. Invariably, most would leave the portability box unchecked and go for the lowest possible rate.

One of the lenders that routinely offered the lowest rate at the time also had one of the worst portability policies ever. To port, they made you close the sale of your old home and new home in the same calendar month, which is often not easy since the average closing timeframe is somewhere around 40 to 50 days.

We generally tried to talk people out of this mortgage, but many just wanted the cheapest rate. We would periodically hear from borrowers who’d closed their purchase and sale in different months, asking what options they had to avoid a penalty and keep their rate. There were few great options, and some had to break their mortgage, lose their deep discount rate and pay a penalty to boot.

People are mobile

The importance of portability was again in the spotlight on Monday after a Statistics Canada report on why people move. The list of triggers is long, with the main ones being:

Upgrading to a more suitable dwelling (25.3 per cent of movers)

• Moving to a better neighbourhood (13.5 per cent of movers)

• A growing household (13.5 per cent of movers)

• Job change (9.1 per cent of movers)

• Moving closer to family (9.0 per cent of movers)

• Reducing housing costs (8.6 per cent of movers)

• Reducing commuting time (7.7 per cent of movers)

Some of these reasons are curveballs — stuff folks don’t think about when signing on the dotted line. But they happen a lot. The rule of thumb is that homeowners move every five to ten years, depending on their life stage.

That means most homeowners with two consecutive five-year mortgages will need to rework their mortgage at least once before the term ends. (Side note: Five years is still the most popular mortgage length if you include both fixed and variable terms.)

In short, life changes happen, and flexible ports are a money-saver. In the next rate-hike cycle, they’ll matter even more than they do today.

So, if you’re out there mortgage shopping and there’s a half-decent shot you’ll relocate before the term expires, hunt for lenders that let you take the mortgage with you without crazy restrictions.

Prioritize the ones that:

Article content

• Allow at least 60 days to move your mortgage from your old property to your new property. For less stress, aim for 90 to 120 days.

• Allow porting of variable-rate mortgages (many don’t, and it can cost you your rate discount and at least a three-month interest penalty if you have to break early)

• Allow “port and increases,” which helps if you buy a pricier home and need to borrow more money. Some lenders don’t offer this feature, or at least not at low, transparent rates.

Six last tips to remember:

1. You still need to re-qualify from scratch to port — new application, new scrutiny. If your income falls for any reason, your credit declines or your debt ratios surge, porting may be a fantasy.

2. Some “no frills” mortgages are not portable at all. Unless there’s practically zero chance of you moving before your mortgage contract matures, don’t even think about these products.

3. Beware that some lenders insist on resetting you to a fresh five-year term just to “port.”

4. Credit union mortgages generally don’t let you port out of province, unless it’s one of the few federally-regulated credit unions. That’s a problem for the six per cent of movers who move out of province.

5. If rates have fallen, compare your prepayment fees to the interest cost of keeping your higher rate.

6. If you plan to close your purchase before you sell, make sure the lender will advance its new mortgage before the old one is paid out, and offers bridge financing (a short-term loan for the down payment on your new home) if you need it.

Lack of portability can financially trap people in their homes in cases where they can’t afford or qualify for a new mortgage.

This is exactly why U.S. home sales fell off a cliff in 2022. Americans can’t typically port their mortgages, so millions of families were voluntarily imprisoned by their own financing terms — forced to either stay put or face drastic payment hikes.

Fortunately, this isn’t a problem for reasonably qualified Canadian borrowers, provided they pick the right mortgage.