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  • Writer's picturePaul Therien

The Assumable Mortgage

It sounds like fiction to some people, but it is as real as the nose on your face! So what exactly is an assumable mortgage?

An Assumable mortgage is one where the buyer of a home can take over the responsibilities for your mortgage. This little known feature of many mortgages is not one that is routinely shared with consumers by mortgage lenders, or even mortgage brokers. The reason is that these products do not make them money, but they do help you as a consumer - greatly.

Here is a case study to help illustrate the power of an Assumable Mortgage.

In 2019 we secured a mortgage for a customer on a property in North Vancouver. That mortgage was a 10 year fixed rate product at a mortgage rate of 3.09%. When we did this mortgage we, as brokers, were discouraged by the lenders and other mortgage brokers to fund this mortgage. Not because it was bad for the borrower, rather it was not so good for the lender (or even us brokers). Why was it not good? The quick and dirty answer? Money. A 10 year fixed rate mortgage earns lenders less money over the longer term, and as brokers it means that there is less likelihood that the customer will need to refinance. Why would they with such a great long term rate? The advantages are squarely on the side of the borrower, even when considering the higher penalties that could be levied should it be necessary to break the contract. If the mortgage is portable, and assumable however, the risk is minimized.

Take our example and let's look at how it benefited the customer.

Fast forward to 2023 and our customer is in need of selling the home as it no longer fits the needs of their growing family. Rather than port the mortgage, they chose to use it as a selling feature of their property. They listed and as a part of their listing, they advertised that a rate of 3.09% was available for 6 years, guaranteed, should the buyer qualify.

The home sold in under 30 days, versus a similar unit in the same complex that still has not sold to this day and has been listed for 12 months now.

In the world of interest rates the rule of gravity (What goes up must come down) does not apply, in fact it is most often the opposite. What goes now must, and will, eventually go up. Over COVID every lender, broker, and economist was touting the low rates and low cost to borrow. They encouraged people to take on more and more debt because it was "affordable". Consumers across the country were assured over-and-over again that rates would return to Pandemic levels, and yet there are limited economic numbers to support that claim.

If more consumers were provided with advice that considered longer term implications, instead of just "buy now worry later", we would not be seeing the issues in the market place today. This is particularly true of people who own rental accommodations. The suggestion that an investment property be financed short term, or on a variable rate, is simply poor business planning. A longer term, fixed rate, not only guarantees stability for the owner of the property, it does the same for the tenant. (The argument about saving interest charges is not as relevant with an investment property given the ability to claim interest and expenses as a tax deduction on rental properties).

Another case in point. Over the years we have done financing for homeowners who then place the property into a rent-to-own program that gives their tenants an opportunity to purchase a property they have been renting. Here an assumable mortgage plays a very important role as it allows the tenants to secure financing at a more predictable rate, and when rates go up, even at a lower rate. It not only makes the mortgage more affordable, it makes getting approved more predictable if there was a proper plan in place from the start. The point here is that no matter what mortgage you end up with, it is rarely a "short term" solution that is required. The majority of Canadians who own their homes want to retire debt free, they want financial security and stability, they want certainty whenever they can get it. A longer term fixed rate mortgage can provide that certainty.

No matter what mortgage you end up with, you must remember that this is your financial future on the line. Your mortgage broker should be discussing all options with you, and they should never "steer" you towards a specific product or lender. You should always be provided choice and not just because the law states that this is how it is to be. You should be provided choice because it is the right thing to do.

Make sure you find out if your mortgage is Assumable, portable, or both. It could save you tens of thousands and help you sell your home faster, for more money.

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