Here are your mortgage options when you sell your home before your mortgage term is up

When it comes time to sell a property you own, unless you’ve already paid off the principal, it’s inevitable you will still need to deal with the mortgage and your lender. As you may know, when you sell a home with an outstanding mortgage, the proceeds of the sale will be used to pay off the remainder of the principal balance on the mortgage. Depending on where you are in your mortgage term and the type of mortgage you have, you may also need to pay mortgage penalty fees for breaking your mortgage term early.

Recommended reading: A guide to breaking your mortgage early

Let’s go over your mortgage options when it comes to selling your property.

What happens if I sell my home before my mortgage renewal?

What happens when you sell your home with a mortgage still outstanding, first depends on whether your mortgage is open or closed. An open mortgage doesn’t come with any penalties for ending your mortgage term early, meaning you can simply end your mortgage without incurring any fees. A closed mortgage on the other hand means you’ll be breaking your mortgage terms by paying off the balance of the mortgage early. The vast majority of mortgages in Canada are closed mortgages. A closed mortgage means the mortgage has limits to how much can be repaid before maturity without the borrower incurring a penalty. 

Under the assumption that you have a closed mortgage, you will inevitably end up owing mortgage penalty fees for paying off the balance of your mortgage early. This will vary depending on the terms of your mortgage. The difference between a typical mortgage penalty and an Interest Rate Differential could be an entire order of magnitude for example.

Selling your home after a renewal

If your mortgage renewal is coming up and you plan to sell shortly after, your best option is to renew with mortgage terms that are favourable for breaking your mortgage early. One example of this would be to switch lenders to one that offers an open mortgage which will allow you to break your mortgage without any fees. This is rare for lenders to offer however, and a more realistic option would be to renew with a 1 or 2 year variable mortgage which will likely have the least amount of fees for breaking your mortgage early. Open mortgages typically have higher interest rates than closed mortgages so you will need to calculate the exact amount you’ll be saving in penalty fees or lower interest rates to determine the best option for you. Sign-up to Perch today and our mortgage advisors will help you determine the best mortgage strategy for your situation.

How to avoid mortgage penalty fees when selling your home

Other than going with an open mortgage to begin with, there is an alternative to breaking your mortgage early if you plan on selling your property and purchasing a new one.

This is accomplished by transferring your existing mortgage over to your new property, by porting your mortgage.

How to port your mortgage 

Porting your mortgage allows you to transfer your current mortgage with its terms, over to your new home. This is very useful when you’re moving before you’ve paid off your current mortgage, and you want to keep your mortgage terms or avoid paying fees to break your mortgage. 

Porting your mortgage is a relatively simple process. First you sell your current home and the money is used towards the purchase of your new home. From there if there’s any amount not covered by the sale, you’ll need to borrow that amount from the lender, or come up with the difference yourself. Your mortgage will then be transferred to the new property and you’ll continue paying as you have before.

Whether your lender will port your mortgage is decided on a case by case basis. To know for sure whether you can port your mortgage you’ll need to talk to your mortgage representative.

There are some general conditions for being approved for porting your mortgage however.

First of all, most lenders will only port a fixed rate mortgage. If you’re on a variable rate you will likely be required to change to a fixed rate for your lender to port your mortgage. Another factor to consider is that if your new home is more expensive than your old home, you’ll need to requalify for your mortgage, which means checking your income, debt, and credit history.

Conclusion

When it comes time to sell a property with a mortgage still outstanding, you’ll have to calculate which of the previously discussed options is right for you. Porting a mortgage isn’t always the cheapest option, as interest rates could have fallen since the start of your mortgage and you could save money even after paying mortgage penalty fees. At Perch we’ll help you plan your mortgage strategy and access our mortgage search engine to find the best lender for you.