Mortgage shoppers tend to focus squarely on securing the lowest rate possible, sometimes to the detriment of other features.
One feature that routinely gets overlooked is mortgage portability.
What is mortgage portability? How can it work to your advantage? Let’s dig into it.
What it means to “port” a mortgage
In the simplest terms, porting means substituting the property your mortgage is secured against.
Essentially, you’re moving your existing mortgage contract and its outstanding balance to your new home.
If your new home costs more, you may need additional mortgage funds to finance the difference in the purchase price. In most such cases, lenders let you “port and increase.” That allows the borrower to keep his/her existing rate but add new money at the lender’s current rate. The two rates are then blended together to give you one new weighted average rate.
The purpose of porting
Porting can save you a lot of money if you decide to move. It does so in two ways:
- It lets you avoid paying a mortgage prepayment penalty when you change homes
- It lets you keep your current mortgage rate (vital if rates have climbed substantially since you got your mortgage).
This last point could become increasingly important for those who secured historically low rates this year. If rates are higher in a year or two, the last thing you want is to move and pay 0.50, 1.00 or 1.50 percentage points more interest for no reason.
Finicky portability terms
With porting, the devil can be in the fine print. As we’re about to illustrate, not all portability is created equal.
For one thing, there’s the “port gap.” The port gap is basically how much time you have to move your mortgage to a new property once your old home sells.
Generous lenders allow for a gap of up to 120 days, sometimes longer. More Scrooge-like lenders give you a few as 30 days, or sometimes just one day! That’s right, with some deep-discount lenders, they actually expect you to miraculously close your new purchase and sell your old home on the same day. Insanity.
Keep in mind that the average closing period is 45 days, give or take. So, if there is a better than 20% chance you’ll need to move before your mortgage term is up, look for a mortgage that allows you at least 30 days to port. If the chances of moving are more like 50%+, look for at least a 60-day port gap.
High blend rates
If you move and need a bigger mortgage, porting alone isn’t enough. You’ll also want a lender with a good port-and-increase policy.
That means a lender that gives you fair competitive rates on any new money you add to your mortgage.
Why would you need new money? Well, let’s suppose:
- you have a $400,000 home today and a $300,000 mortgage at 2%
- you want to move to a $500,000 home next month
- you have no extra savings, and the best mortgage rates now are 3%
This means you’d need to borrow another $100,000.
With a port-and-increase, you’d keep that great 2% rate on the $300,000 loan amount and add another $100,000 at 3%, for a blended rate of 2.25%.
The problem is, some greedy lenders don’t give you their best rate on the new money. Instead of 3%, they might charge you 3.25%.
Some lenders don’t offer blend and increase at all! They make you pay a penalty to port and increase.
To avoid this, always ask a lender two key questions:
1. Do you offer a blend-and-increase feature with absolutely no prepayment penalty?
- RATES Tip: sometimes they’ll say yes, but not disclose that they build the penalty into the new mortgage rate. Make sure there is no penalty of any kind, whether it's out-of-pocket or built into the new rate.
2. What rates do you provide on blends?
- Favour lenders with highly competitive published rates or deep-discount mortgage broker rates. Many lenders claim to offer “competitive” rates, but when it comes time to port, their definition of competitive may be far looser than yours.
Remember, even a 0.2-percentage-point rate difference is material on a $100,000 mortgage increase — roughly $933 over five years. So if you get a 5-year mortgage and there’s a good chance you’ll move and borrow more money, it pays to pick a competitive lender from the get-go.
Compare Mortgage Rates
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.
The portability premium
Lenders with the best porting flexibility often charge higher rates. It then becomes a question of whether a higher mortgage rate for more flexible portability terms outweighs the upfront rate savings of a “less frills” lender.
Note that as we write this, the lowest 5-year fixed mortgage rate on RATESDOTCA sits at 1.35%. As it turns out, that lender gives you as little as one day to port. Basically, that means its porting feature is nearly worthless because, as noted above, it’s very difficult to align the sale of your existing home with the purchase of your new home.
How much should you pay for added portability flexibility?
- you have the average Canadian mortgage balance of $286,000
- source: TransUnion as of Q3 2020
- you’re three years into your five-year mortgage term
- your current mortgage rate is 2%
- you need to move to a new home
- your lender offers only a 30-day port gap but you need 45 days to close
- your lender will charge you a $5,000 penalty to break your mortgage early.
Had you chosen a lender with a flexible porting policy; you’d save that $5,000.
But instead, lack of a good port feature has raised your three-year borrowing cost by $5,000, which is equivalent to paying a 0.60-percentage-point higher interest rate!
That’s enormous given that lenders with flexible mortgage portability typically charge just 0.05- to 0.15-percentage-point premiums.
The takeaway: If there’s a fair chance you’ll need to move before your mortgage matures, consider small premiums for great port features as money well-spent for insurance. It could potentially save you a crippling penalty or a bad rate on new borrowing.