This article is part of Global News’ Home School series, which provides Canadians the basics they need to know about the housing market that were not taught in school.
For hopeful Canadian homebuyers feeling sidelined by the market’s higher interest rates, assuming a mortgage from a seller holding onto a lower rate can be an affordable way to skirt today’s sizeable borrowing costs.
But experts say mortgage assumption comes with risks for the seller and some downsides for buyers that make it a rare feature in home sales.
For Toronto-based Realtor Mikayla Rugala, though, a mortgage assumption was just the ticket her client needed to sell off a condo late last year.
She tells Global News that her client was set to hit the market in the fall, but their pricing hopes were dashed when a nearby comparable unit sold for “significantly lower” than what the seller had in mind.
This came as mortgage rates were hitting a recent peak, which Rugala says meant buyers were either looking for a great deal or were willing to wait until interest rates started to fall.
“We were trying to figure out, how can we encourage buyers and tackle that pain point head on?”
Around that time, Rugala says she heard from another Realtor friend in Ottawa who was telling her about the success their brokerage was having by advertising low, assumable mortgage rates to get buyers interested in properties.
Rugala’s client had a low, fixed interest rate on the mortgage on the property of around two per cent locked in for another two years. Compare that with rates on offer to most buyers in the market today, which are typically floating between five and six per cent for a fixed mortgage.
With prospective buyers looking for a steeper cut on price than the seller was willing to accept, making the assumption of the seller’s mortgage a condition of the offer was a way that both parties could come out happy, Rugala says.
The seller got a higher price than buyers would have otherwise been willing to offer, while at the same time, the buyer’s monthly carrying costs would become significantly lower than if they’d bought a property of similar value with a new mortgage in today’s market.
Victor Tran, broker with True North Mortgage and the mortgage and real estate expert at Rates.ca, tells Global News that assuming a mortgage can “absolutely” be a more affordable way for a buyer to get into the housing market when the circumstances align to get such a deal done.
But he warns that there are “a lot of stipulations” that come with assuming a mortgage. It’s a “rare” case where buyers and sellers both benefit from the tool, he says.
From the buyer’s perspective, assuming a mortgage doesn’t just mean taking on the seller’s rate. A buyer is taking on the entirety of the mortgage — the outstanding principal amount and the remaining term and amortization included, Tran explains.
This means that if the seller’s remaining mortgage is less than what a buyer needs to finance their purchase of the property, they might need to make up the difference with a much bigger downpayment than planned.
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For instance, say a buyer is purchasing a home at a price of $500,000, but hopes to assume the seller’s remaining mortgage of $350,000. If the buyer had been planning to pay a down payment of five per cent ($25,000) towards the purchase of the home, they would instead have to cover the rest of the difference between the home’s value and the size of the mortgage ($150,000).
“Assuming the balance as-is could be difficult depending on what the purchaser’s down payment is,” Tran says.
Rob McLister, mortgage strategist at MortgageLogic.news, says buyers who need to cover the difference can sometimes get their existing lender to loan them more money and “blend” the rate on that new funds with their existing rate on the old mortgage. But he told Global News in an email that buyers would be “at the lender’s mercy” on the rate they’re offered on the new borrowing.
Assuming the same amortization — the time over which the mortgage is repaid — can also put a significant burden on buyers if there are fewer than the typical 25 years left on the loan, Tran says. Repaying the full amount over a shorter period of time can mean costlier monthly payments than a buyer was expecting, even at a lower rate of interest, he says.
In order to assume a mortgage, a buyer will have to go through the full qualifying process with the seller’s lender, including credit score checks and appraisals on the property.
Some buyers might find relief in assuming a mortgage today because it could allow them to more easily meet the minimum qualifying rate, otherwise known as the mortgage stress test, Tran says.
The stress test sees buyers qualify to make payments on a mortgage at either 5.25 per cent or the contract rate plus two per cent, whichever is higher. In today’s market, most buyers are qualifying at around 7.5 per cent, Tran says.
But assuming a mortgage with a contract rate of two per cent, for instance, would see a buyer have to pass a stress test of only 5.25 per cent — a lower bar that could see the buyer qualify for a bigger mortgage than the market’s current higher rates would normally allow, Tran explains.
For sellers, offering up a mortgage comes with a few upsides but plenty of risk.
Firstly, a low mortgage rate in today’s market can be golden for existing homeowners who port or blend that rate towards buying a new property.
Rugala says that not all sellers need to hold onto that rate, however, and may benefit from offering it up to a would-be buyer. That includes investors or other owners who may be exiting the housing market, or someone moving out of the country who can’t take their rate with them.
Tran notes that sellers can also skirt the penalty for breaking their mortgage if a buyer is willing to take over the loan. But he says that in today’s market, paying three months’ interest to break a mortgage is usually preferable for sellers who want a “clean slate” after the sale of their home.
That’s because even after a home is sold and the buyer assumes the mortgage, the seller might not be fully off the hook.
If a buyer assumes a mortgage and then defaults on the loan, a seller can sometimes be held liable by the lender if there’s a shortfall on payments after the home is liquidated, McLister explains.
Depending on the contract, that liability can expire after the new owner makes a certain number of payments, such as 12 months’ worth, he adds.
But Tran says that level of risk on such a sizeable loan can turn many sellers off from the prospect of a mortgage assumption in the first place.
“Sellers often don’t want to be liable for something they have no control over,” he says. “So assumptions are actually not very common.”
Rugala says mortgage assumptions haven’t been a meaningful facet of the market since the 1980s and 90s, when elevated interest rates had buyers scrambling for relief and sellers had a reason to promote assumable mortgage rates.
The rapid rise in interest rates from the Bank of Canada over the last two years has put the option back on the table in today’s environment, she says.
Advertising an assumable mortgage can be a creative approach to get more buyers to view a listing, Rugala says, but sellers will have to gauge what they stand to lose before deciding whether it’s worth getting a sale and the price they want.
“With the headache and the risk that the seller will have to take on, it may not be worth it,” she says.
“But it is a strategy if you have nothing left to really offer.”