What Is An Assumable Mortgage: All You Need to Know

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Overview Of Assumable Mortgage In Canada

An assumable mortgage is a type of mortgage program that allows you to transfer your mortgage loan to the new buyer of your house.

A mortgage assumption might appeal to potential buyers in the rising interest rate environment. Your current low-rate mortgage (compared to the market rate) will be attractive to potential buyers.

What Is An Assumable Mortgage?

An assumable mortgage is a type of mortgage program that allows you to transfer your mortgage loan to the new buyer of your house.

In order words, you are selling your house and the mortgage loan as one package.

The new buyer accepts to take over your property and mortgage debt by assuming your mortgage.

The buyer will now bear the obligation of making the required monthly payments on the mortgage loan. But you will only be freed from the mortgage loan liability after the new buyer has made consistent payments for a minimum of 12 months.

Understanding Assumable Mortgages

If you buy your house with a mortgage loan, you have to apply and get approved for the mortgage loan. The mortgage loan comes with the monthly obligation to make consistent interest and principal payments.

In addition, if the mortgage is default insured, you will have to pay the default insurance premium as part of your monthly mortgage payment.

If you decide to sell the house before the end of your mortgage term, you may use the assumable mortgage option to transfer the mortgage loan to the new owner.

Getting the new homeowners to assume your current mortgage terms will let you off the hook for paying the prepayment penalty, which can amount to tens of thousands of dollars.

An assumable mortgage allows the new buyer to assume the terms of the mortgage as it is. That new buyer will assume the mortgage balance, the interest rate, mortgage term, and other aspects of the contract.

A mortgage assumption can appeal to buyers since it enables them to skip the headache of going through the rigorous process of seeking a new mortgage loan.

Characteristics of Assumable Mortgages

An assumable mortgage has the following features:

The mortgage must be assumable. This is usually indicated in the loan documents under the assumption clause. The mortgage is not assumable if the loan term is stated as a “due-on-sale.” You should check with your lender before starting the process.
The original terms of your mortgage bound the buyer – mortgage rate, loan balance, repayment period, etc., cannot be changed.
The buyer takes over the mortgage loan obligations and must make the monthly payment as outlined in the mortgage contract.
The lender must approve the assumption, and if the mortgage is default insured, the insurance provider must also approve the assumption transaction.
The buyer’s income, credit, and down-payment will be evaluated like any standard mortgage application.

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How Does Assumable Mortgage Work In Canada?

Before mortgage assumption can occur, your lender must review and approve the new buyer. Your default insurance provider must review and approve the new buyer if the mortgage is default insured.

Just as you were evaluated and approved for the mortgage, the lender will review the new buyer’s credit score, credit repayment history, income ratios, and down payment (if required) sources. Likewise, you must be up to date with your mortgage payment to allow for smooth processing of the mortgage assumption.

If the buyer is approved for the mortgage assumption, the lender will then complete the transfer of the contract and the property title to the new buyer. The new buyer must pay the difference if the property value exceeds the outstanding mortgage balance.

In Canada, your liability of the mortgage loan will only be fully released after 12 months of consistent mortgage payments by the new owner. Speaking with an expert mortgage professional or even a licensed real estate lawyer is advisable before going into a mortgage assumption transaction.

Why Are Assumable Mortgages Attractive?

A mortgage assumption might appeal to potential buyers in the rising interest rate environment. Your current low-rate mortgage (compared to the market rate) will be attractive to potential buyers.

When selling your house, you can use your assumable mortgage to incentivize potential buyers, especially in periods of rising mortgage interest rates. You can use a low mortgage rate to incentivize potential buyers. They can save thousands of dollars if your mortgage still has a few years to mature.

For example, a $425,000, 3-year fixed-rate mortgage offered at a 3.59% rate would result in monthly payments of $2,142.14, and the total interest you will pay over the 3-year term will be $43,730.60.

The same mortgage offered at a 1.89% rate will result in monthly payments of $1,777.19 and a total interest payment of $22,885.88 over the 3-year term. The buyer will save $20,844.72 by assuming your mortgage and the reduced monthly payment obligation.

Pros and Cons of Assumable Mortgage

While an assumable mortgage benefits the buyer and seller, there are also disadvantages.

Pros of Assumable Mortgage

Prepayment Charges

There is usually a penalty when you pay off all or part of your mortgage before the end of the contractual term. You have to note if your mortgage has an Open or Closed term. You can prepay an open-term mortgage in whole or part without a prepayment penalty.

On the other hand, you cannot prepay, refinance or renegotiate a closed mortgage before the end of the term without a prepayment penalty. These penalties can amount to tens of thousands of dollars. One way to escape this penalty is by getting someone to assume your mortgage.

Lower Rate For The Buyer

As explained above, one of the main motivations for a buyer to assume your mortgage is to enjoy your low-interest rate. Mortgage assumptions are more attractive in a rising interest rate environment. Low interest will make your property more marketable if the buyer can assume your current mortgage.

Reduced Mortgage Search Costs

Another attractive point for an assumable mortgage to potential buyers is to escape the rigorous mortgage search process. The proliferation of rate comparison websites makes this advantage less appealing as it is now more accessible for people to compare rates online.

However, your assumption mortgage will attract buyers with not-so-good credit and income profiles as it helps them avoid the rigorous underwriting process. They will still go through the regular mortgage underwriting and approval process.

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Pros of Assumable Mortgage

Substantial Down Payment

The biggest drawback to assuming a mortgage is that the buyer needs to provide a higher down payment amount than they would need when applying to get their mortgage. The buyer will have to repay the money you put down when you first bought the house and reimburse you for any of the built-in equity or the appreciated value of the property.

For example, you bought the home for $500,000.00, of which you made a down payment of $25,000.00, and got a mortgage loan of $475,000.00 when you purchased the house two years ago.

If the house is now valued at $550,000.00, the buyer will reimburse the $25,000.00 down payment and pay you the $50,000.00 appreciated property value. To assume your mortgage, the buyer will have to bring $75,000.00 in cash. The transaction will not go through if the buyer does not have that amount. Your lender might as well allow them to get a second mortgage loan to help with that required down payment.

High Default Risk

If the buyer ends up getting a second mortgage to help with the payments of the upfront money, the buyer will be exposed to high default risk, which will still affect you.

Note that you will only be off the hook for the mortgage obligation after the new buyer has made payments as required consecutively for 12 months. There is an inherent risk in managing two mortgage payments. Also, a second mortgage loan comes with a high rate, which may end up wiping off the interest rate benefits of your low mortgage rate.

Mortgage Insurance Premium Costs

The buyer may end up paying a higher default insurance premium than if they had applied for a mortgage directly with a lender. Default insurance rates are based on your loan-to-value ratio, which is based on the amount of down payment you made towards purchasing your home.

Continuing with the example above, for your down payment of $25,000.00 for a $500,000.00 house, your default insurance premium will be $19,000.00 (a 4.00% premium rate). For a similar home priced at $500,000.00 but with the required $80,000 down payment, your default insurance premium will be $11.760.00 (at a 2.80% premium rate).

Is Assummable Mortgage Worth It?

In conclusion, an assumable mortgage is beneficial when the interest rate is considerably lower than you can get elsewhere. Still, the down payments may negate the benefits. So, you need to do the math to see if your financial circumstance and needs allow for it.

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What Is An Assumable Mortgage: All You Need to Know

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In This Article

Overview Of Assumable Mortgage In Canada

What Is An Assumable Mortgage?

Understanding Assumable Mortgages

Characteristics of Assumable Mortgages

Shop Across 25+ Lenders For Your Best Mortgage Deals

How Does Assumable Mortgage Work In Canada?

Why Are Assumable Mortgages Attractive?

Pros and Cons of Assumable Mortgage

Pros of Assumable Mortgage

Prepayment Charges

Lower Rate For The Buyer

Reduced Mortgage Search Costs

Shop Across 25+ Lenders For Your Best Mortgage Deals

Pros of Assumable Mortgage

Substantial Down Payment

High Default Risk

Mortgage Insurance Premium Costs

Is Assummable Mortgage Worth It?

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