Mortgage shoppers are probably 10 times more likely to ask, “What’s your best rate?” than, “What’s your mortgage portability policy?”
Portability is a feature that lets you move your existing mortgage rate and terms from one property to another, without penalties. Over 90 per cent of standard mortgages have this feature, but the details vary. Portability is usually an afterthought, if a thought at all. Here’s why that’s a mistake.
People move
While there’s no good recent data I’m aware of, an industry rule of thumb is that people move every seven years, give or take. First-time buyers historically move even more frequently, usually within the first five years of getting a mortgage.
People relocate for all kinds of reasons: moving to a more affordable region, job offers, family growth, divorce, downsizing, upgrading, death or illness, among others.
One of the first things mortgage shoppers should do is ask themselves: What’s the probability I won’t be in this home in the next X number of years? Of course, no one can foresee things like an illness or death but job uncertainty and plans to expand a family could factor in.
Lowest fixed and variable mortgage rates in Canada for November 2 2023
X, in this case, should equal the mortgage term(s) you’re considering, minus nine months if it’s a fixed mortgage (owing to how mortgage penalties are calculated). If you want a five-year fixed mortgage, for example, guestimate the likelihood you’ll move within 4¼ years.
Let’s say for conversation that you get a $400,000 mortgage and your probability of moving before 4¼ years is 75 per cent.
And let’s say that you’ve found two mortgage offers you’re interested in:
- Mortgage A with a 6.00-per-cent fixed rate and a great portability policy.
- Mortgage B with a 5.75-per-cent fixed rate and a restrictive portability policy.
Which should you take?
Well, if you can’t port and you want to move, you’ll pay a penalty to break that fixed mortgage early. Penalties can vary drastically depending on the lender, rates and other things, but for this purpose, assume it’ll be 4 per cent of your mortgage balance, or $16,000 in this example.
To justify choosing the cheaper lender with the worse penalty policy, the interest savings should exceed the expected value of the potential penalty. In this example, the savings should exceed 75 per cent of the $16,000 penalty, or $12,000.
But, getting a quarter-percentage point off your rate on $400,000 only saves you $4,800. So, mathematically, going for that lower rate isn’t worth it based on portability alone. Note: For simplicity in these calculations, I ignore the time value of money – that is, future interest is paid in less valuable dollars.
By the way, here’s a simple calculator to ballpark the savings between two rates:
Variables are different
Penalties are much less painful on most variable-rate mortgages, typically only 1.5 per cent of the balance or less, based on current rates. That’s because variable-rate mortgage penalties are usually three months of interest, as opposed to the interest rate differential of a fixed rate. I won’t get into how the differentials work, but suffice it to say that penalties can be at least three times worse than a three-month interest penalty – because of how they’re calculated.
The point is, one typically incurs less portability risk with a variable-rate mortgage.
Albeit, some variables aren’t portable at all, so if that’s important to you as a floating-rate borrower, make sure yours is.
Rates affect penalties
Future rates are a major factor in calculating penalty risk. If you can’t port, but rates shoot materially higher, you’ll often pay just a three-month interest penalty. Not the end of the world.
But if you get a fixed rate today, break that mortgage in a few years, and rates are meaningfully lower (as the market currently expects), those interest rate differential penalties I discussed can be huge.
So the message here is, if you’re getting a fixed term over two years and you might want to move before the mortgage matures, be darned sure the portability policy is good.
What makes a good portability policy
The worst portability policies require you to close your current home’s sale on the same day as your new home purchase, which is quite unlikely. You might as well have no portability options at all. This policy is common with some mortgage finance companies.
Other lenders give you up to 30 days to port, which is a little better but still not ideal given the average home purchase closes in roughly 45 days.
“Opting for a longer window than 30 days can provide a valuable safety cushion,” says Paul Meredith, a mortgage broker at CityCan Financial. Also, if you haven’t sold your current home yet, he recommends setting the closing date for your new purchase at least 90 days out, to allow enough time to complete the sale of your current home.
The best lenders, including many banks, allow four months to port or more.
Last but not least, be sure you can qualify. If you request a port, your lender will make you reapply. Many folks are unpleasantly surprised to learn they don’t qualify for a port because their debt-to-income ratio has become too high, their credit score has fallen too low, or they can’t prove enough income. In those cases, the only options might be to stay put, or break the mortgage, pay a penalty and possibly get a non-prime mortgage for the new property, an expensive proposition.
Canadian mortgage rates are about to get interesting
It was another sleepy week on the low-rate leaderboard but that’s about to change.
First let’s talk about the past seven days. Canada’s most competitive national lenders maintained the status quo on rates, with one exception.
The lowest default insured three-year fixed plunged 30 basis points to 5.74 per cent. That’s the lowest nationally advertised rate for this term, and three-year mortgages are selling like hotcakes right now. You can find this rate at two of the providers we track, Nesto and Pine.
The more interesting conversation is what lies ahead. As you may have heard, the U.S. Federal Reserve held its key lending rate steady on Wednesday. Its messaging suggested a lower probability of further rate hikes, leading the market to believe rates have hit a ceiling. I’ll reserve judgment on that, but the market sees just a 29-per-cent chance of any further Fed hikes.
If we entertain the idea that rates have peaked out, two truths emerge.
Firstly, we should expect lower fixed rates fairly soon.
Secondly, variable rates are starting to look less like a tightrope walk for well-qualified borrowers. That’s key given that floating rates are near or below most fixed rates right now. Expect variables to give fixed mortgages a run for their money in the weeks ahead. The former might just become the new trend.
Rates were sourced from the MortgageLogic.news Canadian Mortgage Rate Survey on Nov. 2, 2023. We include only providers who advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20-per-cent down payment or switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
Robert McLister