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Porting a Mortgage: Understanding How Mortgage Portability Works

Porting a Mortgage: Understanding How Mortgage Portability Works

If you have a mortgage or you’ve read up on the subject, you may have heard of the term, porting a mortgage. Porting is a process that has saved countless homeowners thousands of dollars in interest costs when they buy and sell a home. But what is porting exactly, and how does it work? You could ask your mortgage lender, but to make things easier, I’ve created the following guide to porting a mortgage.

How Does a Mortgage Port Work?

Mortgage portability is a common feature found in mortgages from various lenders. It allows a borrower to avoid breaking their mortgage contract if they decide to move to a new home before their current mortgage term expires.

When you port a mortgage, you’re transferring the existing term and interest rate to the new property. One of the key stipulations when porting your mortgage is that you sell your old home and buy a new one at the same time. Lenders will usually allow a window of 90-120 days for the purchase and sale transactions to take place.

Another stipulation is that you have to stick with your current mortgage lender. For example, you cannot port a mortgage from Scotiabank to TD. If you decide to switch lenders, your only option is to break the contract and pay the total penalty.

Why Would I Want to Port My Mortgage?

There are two reasons you might want to port your mortgage. The first is to avoid paying what could be a hefty penalty if you were to break your mortgage contract mid-term. Mortgage penalties can be very steep in some circumstances, especially if the interest rate you have is significantly higher than current rates.

Another reason for porting your mortgage will be to keep your same interest rate if current rates are higher, for obvious reasons.

Example of a Mortgage Port

I’ve created the following scenario to show you how a mortgage port would work. Keep in mind that the numbers I’m using are purely for illustration and not necessarily accurate.

Let’s say you currently have a $200,00 mortgage, with 36 months remaining in a 5-year term, at a rate of 2.34%.

You and your spouse decide that you want to move across town to a home with more space for your growing family. A new house means that you will need to increase your mortgage by $100,000 to $300,000.

The problem is that if you break your current mortgage, you’ll be subject to an interest penalty of $3,500. As an alternative, your lender offers to port your existing mortgage to the new property, avoiding the penalty. Here’s what would happen:

$200,000 would remain at 2.34%. The increased amount of $100,000 would be at the current 3-year rate of 2.19%. The result would be a $300,000 mortgage at a blended interest rate of approximately 2.29% (weighted average) for 36 months.

Once the 36-month term has expired, your lender would allow you to renew your mortgage into a new term and rate of your choosing.

Is My Mortgage Portable?

You should always find out if a mortgage is portable before you apply. That way, you know ahead of time if you decide to switch properties in the middle of the mortgage term. While most lenders have a portability feature built into their mortgages, the rules can vary. Generally speaking, fixed-rate, closed term mortgages tend to be portable, and variable mortgages are not.

So, if you are in a variable rate mortgage and you decide to move houses, you’ll have to pay a 3-month interest penalty to break the mortgage before starting over with a brand new mortgage on the new property. This might not be a bad option. If you have a reasonable interest rate, a 3-month interest penalty might not be that high.

What Happens If My New Mortgage Is Smaller?

You may decide to move to a more affordable home, which would result in a smaller mortgage amount. You can still qualify for a mortgage port, but you would have to pay the penalty on the excess mortgage amount that is going to be paid off. You can then port the remaining amount.

For example, let’s say you have a $300,000 mortgage, and you’re downsizing to a home that will only require a $200,000 mortgage. In this case, you would have to pay the penalty on the $100,000 being paid down before porting the remaining $200,000. By porting, you avoid the total penalty as it will only apply to one-third of the mortgage amount.

When Does Mortgage Porting Not Make Sense?

A mortgage port won’t always make sense. For example, if you only have a few months left in your mortgage term, the chances are that your penalty will be insignificant if you have one at all. In that case, you’re better off breaking the contract and going with a brand new mortgage.

Here’s another scenario. If the rate on your mortgage is a lot higher than current interest rates, it may be worthwhile paying the mortgage penalty to lock in a much lower rate for a longer period, say five years. However, this move could be risky, and it involves some speculation on your part that interest rates will be rising in the future. In other words, you might not know if it was the right move for a few years down the road.

Porting with a Mortgage Refinance

Did you know? You can port your mortgage without selling and buying a new home. Some mortgage lenders will allow you to port your current mortgage term and interest rate to refinance your mortgage on the same property. In other words, you can port your mortgage even if you’re not moving to a new house.

It works essentially the same way. Using the same numbers from our earlier example, let’s say you have a $200,000 mortgage at 2.34% interest, with 36 months remaining in the term. You wish to borrow an additional $100,000 for home renovations and to consolidate some credit card debt.

The current 3-year mortgage rate is slightly lower, at 2.19%. But if you were to break your contract and start over, you would have to pay the penalty in full. Let’s assume that penalty is $3,500. Is it worth it to pay $3500 just to save $300 in annual interest costs? The answer is no.

Instead, your lender may port the 2.34% rate on $200,000, give you 2.19% on the $100,000 increase, then blend the two rates as a weighted average. Your term would not change. After 36 months, you would then be free to renegotiate your mortgage to get the best rate available at that time.

Final Thoughts on Mortgage Porting

Porting can be a helpful tool that may come in handy during the life of your mortgage. But whether or not it’s a good idea depends on several factors, including mortgage rates, your term remaining, and your mortgage lender’s rules. That’s why you should always consult with your lender before making any plans to port your mortgage.

Comments

  1. Ingrid

    Hi Tom,

    Talk about timely advice! We (my husband and I) were just discussing this in the last couple of days as we have 3 years left on on our mortgage and would face about a $40K penalty to break it. Our rate is 3.27 and current offers are as low as 1.45 so breaking the mortgage is tempting but the differential clause means a hefty cost. (We have a 5 year fixed rate.). The only question is whether the rate will go up substantially in year 4 & 5 if we were to get a new reduced rate mortgage now (meaning savings then). Lots to think about. Anyway, I just wanted to thank you for your always interesting articles (and in particular, this one).

    • Tom Drake

      You’re welcome! I was in a similar situation back in 2009, stuck with a high rate and 2-3 years left. The math still worked out for me, where the bank’s calculation was slightly lower than the interest I’d be saving on my new mortgage. So I didn’t port, instead, I paid the penalty upfront and technically recouped it over time thanks to my new mortgage rate.

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