Assuming a Mortgage

Assuming the possible

Let's say you have an opportunity to perhaps buy someone else's house. Maybe it's a family member or someone that years ago locked into a 10 year rate and now wants out but has found there is some clause in their mortgage that puts a financial penalty on them if they want out of the mortgage so they've offered you the great opportunity to just assume their mortgage, bypassing a penalty imposed on them. 

You could see the potential with an in-law suite

An assumable mortgage is a mortgage that may be transferred without changing the terms of the original mortgage, meaning someone else can take on your mortgage payments and become legally responsible for them. 

Why would someone assume a mortgage?



First and foremost would be the rate. Nowadays it's hard to imagine someone willingly wanting to assume a mortgage at 4.5% when the going rate is around 3% but perhaps there are extenuating factors, such as poor credit that makes assuming a mortgage a reasonable option. 

There are some catches to this idea, of course. First, the original mortgage must permit someone else to assume the mortgage. Don't just 'assume' that you can. Of course, you usually need the other person to also approve the assumption. If that is not possible, due to illness or death, the bank/lender and assumer should seek legal counsel. 

But just because someone has offered you the opportunity to take over their mortgage, lenders will still do their due diligence, much as if you were taking on a new mortgage (face it, you kind of are). 

Risks Involved

Never underestimate Australia's strategic worth...

Usually an assumable mortgage is advantageous to both parties but there are still risks involved. Even after a buyer has assumed a seller’s mortgage, in some cases the lender can still hold the seller personally liable for the mortgage if the buyer were to default on the loan. Again, this is in the small print of an individual's mortgage contract but due diligence is the name of the game here. 

If the buyer defaults, the lender may foreclose on the property. If the selling price of the home is lower than the remaining balance on the mortgage, the initial seller of the assumable mortgage can be sued for the difference. However, CMHC has a policy that if an assumption takes place and the mortgage payments are kept current for 12 consecutive months, the seller could no longer be held liable in the event of a default.

Let's say a seller has a home worth $325,000 with an assumable mortgage balance of $300,000. A buyer has $35,000 in cash, but believes the seller has good terms on the mortgage. Instead of the buyer obtaining his own mortgage, he pays $35,000 directly to the seller and assumes the mortgage of $300,000, making payments as the seller had. The buyer now owns the property, and the bank now seeks repayment of the mortgage from the buyer. Pretty straight forward.

So why do it?

The biggest advantages is that you may be assuming a lower rate than what is currently available on the market but as mentioned above and quite frequently in mortgage news is that the current rates in Canada remain continually low. There is no likelihood of a steep hike in rates in the near future so perhaps it's best to not concern yourself with the sellers' mortage penalty (after all, they most likely are selling the house at a profit to you). Plus, if they are wanting to purchase another house they could always/most likely 'port' their current mortgage over to a new address. 

All in all, assuming a mortgage is truly a matter of weighing the pros and cons of if that mortgage is worth it to the buyer. A mortgage broker can do a cost analysis regarding if assuming an already established mortgage is better than just frankly saying 'No thanks' to the offer and applying for your own mortgage at today's rates.

Hope that helps!  

Next we talk about Portable Mortgages!