What is a mortgage assumption?

A mortgage assumption is when you sell your home to a buyer and transfer your mortgage to them as well. It’s likely you have never heard of this because for most of the past decade we have been in a falling mortgage rate environment and nobody wanted to keep their mortgage since a new mortgage had better rates. However, now that rates have shot up in the past few years many sellers are holding onto sub-2% mortgage rates that should be treated as an asset and could even fetch you a higher selling price.

The majority of lenders allow for a mortgage assumption, but you should always check with them first to make sure you’re eligible. If you’re selling the home, consider including the possibility of a mortgage assumption in your listing. 

If you’re buying a home, inquire with the seller about the possibility of assuming their mortgage. If they locked in a fixed rate in 2021 or early 2022 and their lender allows the transfer, you could end up saving thousands in interest. If you’re working with a real estate agent, they can help you with getting the required information.

Is a mortgage assumption worth it?

As you’ll read below, a mortgage assumption should only be considered when there’s a good use case for it. In a mortgage assumption, it comes down evaluating the benefit to the seller and the buyer in order to determine what it should be worth:

• As a seller, the value to you is the penalty savings from not breaking your mortgage. You can use our Penalty calculator to estimate this. 
• As a buyer, the value to you is both the cashflow benefit of lower payments and the interest rate savings from a lower rate. Using our mortgage pathfinder tool, you can enter the assumed mortgage rate as the comparison option and see what the savings would be relative to opening up a new mortgage yourself.

Once you’ve calculated this, the impact on the sale price should then be:

Expected Sale Price – Value to Seller + Value to Buyer.

For example if you were selling a home for $800,000, but you locked in a 5 year fixed rate at 2.5% in 2021 and will do a mortgage assumption with the buyer, saving them on their interest payments: you could include this extra value in the listing or during negotiations to get a higher selling price for your home.

Pros and cons of a mortgage assumption

Naturally, everything comes with a trade-off. Lets breakdown why an assumption could be something worth considering and the reasons you might think it’s not worth the effort:

Pros

• Save on penalties (Seller): In having someone assume a mortgage, the seller isn’t breaking their mortgage. This means that they don’t pay any penalties.
• Sell at a higher price (Seller): Assuming the mortgage rate is low enough to be valuable, a buyer should be willing to pay more for that property if it comes with the mortgage. If it’s the seller’s principal residence, those extra funds on sale would also be tax free!
• Lower payments (Buyer): This will depend on the remaining amortization on the mortgage, but in today’s market environment assumed mortgage rates can be as much as 3.50% below current market rates. These should result in lower payments for the buyer and lower their monthly payment obligations.
• Cost savings (Buyer): Having a lower rate can save the buyer a huge amount of interest over the term of that mortgage.
• Higher Qualifying Amount (Buyer): The stress test will likely be at a lower rate, which means the buyer can qualify for more mortgage.

Cons

• Disclosure (Seller): The seller will have to share the details of their mortgage with potential buyers, which may make some people uncomfortable.
• Mortgage Amount (Buyer): The ideal scenario for an assumption would be that the buyer requires a mortgage that is equal to or less than the seller’s mortgage. Let’s say you’re buying a home for $700,00 and the seller has $500,000 left on their mortgage: you’d want to have $200,000 or more available as a down payment so that the assumed mortgage would be enough to cover the rest of the home’s value. The reason for this is that a mortgage assumption cannot be refinanced until after the transaction (if the lender allows), so if the buyer doesn’t have enough to make up the difference, they would need a bridge loan to cover the extra until they close the transaction and then work with that lender to get a home equity line of credit or increase in their mortgage amount to pay out the bridge loan. If that sounds complicated, it’s because it is. It’s much preferable to do a mortgage assumption when the buyer has enough cash to cover a big enough down payment so that this isn’t an issue.

A mortgage assumption scenario

At Perch, we have helped a few of our clients navigate the sale of their property with an assumption recently and wanted to illustrate the concept to show how it delivered value to both parties.

The specifics

Our client was selling their $1.1M home and had a $650,000 mortgage on the property. The mortgage was with TD, and had a 1.90% fixed interest rate, a remaining amortization of 28.5 years, 3 years remaining on their 5 year term and a monthly payment of $3,100. The client confirmed with TD that their mortgage was assumable.

The calculations

Benefit to the seller
Using our penalty calculator , we calculate that the penalty on this mortgage would be 3 months interest of $3,088. By transferring this mortgage to the buyer instead of breaking it, they would avoid this penalty.

The total benefit to the seller = $3,088

Benefit to the buyer
Using our pathfinder tool , we calculate that the total savings of going with this assumed mortgage vs the current best fixed rate mortgage offer is $74,858.

The total benefit to the buyer = $74,858

Note that the lowest possible buyer’s monthly payment under the current 5-year fixed rate of 4.99% would be $3,465 per month with a 30-year amortization. This is much higher than the assumed mortgage monthly payment of $3,100 per month.

In summary, the expected impact to the property price should be $74,858 – 3,088 = $71,770

The outcome

Some buyers were drawn to the prospect of a lower monthly mortgage payment and it likely contributed to higher traffic to the home. While we can’t exactly determine how much the seller got because of the assumption, we estimate that they were able to get an additional $50-60k on the sale price of their home as a result of this.

As a seller:
Sign up to Perch and get free insights around your expected penalties and the value of your mortgage that you can share with your real estate agent. If you don’t yet have a real estate agent, we can connect you with trusted agents through our referral network.

As a home buyer:
Sign up to Perch and get pre-approved to have financing available regardless. When you find the right property, our mortgage advisors will help you determine the value of the assumed mortgage based on your specific situation.