Moving Before Your Mortgage Term Ends: Porting, Blending or Breaking

Selling before your mortgage term is up doesn't have to mean a large penalty. Here is how porting, blending, breaking and letting your buyer take over your mortgage work in Canada, what each one can cost, and how to compare them before you list.

The short version

Porting: taking your mortgage with you

Porting means taking your existing rate, terms and conditions to your new home, so you don't break your contract. At TD, for example, your balance, rate, remaining term and amortization move to the new house, with no prepayment charge. Not every mortgage can be ported, so check yours first.

• A straight port. The same balance moves to the new home.
• A port and increase. You borrow more, usually at a blended rate (see below).
• A port and decrease. You may pay a penalty on the part you don't carry over. RBC applies its normal prepayment rules, while CIBC waives or refunds part of the charge. Using your yearly prepayment privilege first, if your lender allows it, can reduce the penalty.

Porting isn't automatic. You apply, the new home has to meet the lender's standards, and you qualify again if you borrow more. RBC, for example, charges a processing fee that covers valuing the property, and legal fees may apply. If CMHC insures your mortgage, it charges no new premium on a port if you don't borrow more, raise your loan-to-value ratio or lengthen your amortization.

Timing matters. RBC describes porting for when you buy at the same time as you sell. CIBC can advance the new mortgage up to 120 days before your old one is paid off, and if you sell and buy within 120 days, it may be able to replace its Variable Flex Mortgage, which can't be ported. Ask your lender about its time limits before you set your dates.

Blending: when you need more money

If your next home needs a bigger mortgage, many lenders keep your current rate on the balance you have and add the new money at today's rate, for a single blended rate.

• Blend and increase. You keep your remaining term. CIBC, for example, blends your rate on the remaining balance with its current rate for a similar term on the new funds.
• Blend and extend. You extend your term at a rate that combines your existing rate and the current rate. BMO describes its Blend & Extend Portable Mortgage as a way to extend your term while potentially avoiding a prepayment charge.

As a simple example, $500,000 at an example rate of 3.9% plus $150,000 at an example 4.6% averages about 4.06% on $650,000. Lenders calculate the blend their own way, so ask for the rate in writing. You qualify for the new money, and appraisal and other fees may apply.

Breaking: how the penalty works

If you pay off a closed mortgage before the term ends, including when you sell, you usually pay a prepayment penalty. On a fixed rate, it is generally the greater of:

• Three months' interest on what you owe. BMO uses your rate; CIBC uses your rate plus any discount you received.
• The interest rate differential (IRD). FCAC says lenders usually use it when your rate is higher than current rates and you signed less than five years ago. It is the difference between the interest left on your term at two rates. At TD, BMO, CIBC and Scotiabank, your rate is compared with the bank's current posted rate for a similar term, minus the discount you received.

On a variable rate, the penalty is usually three months' interest (CIBC uses its prime rate). I compare the two rate types in Fixed or Variable? Past the fifth year of a term longer than five years, the Interest Act limits the charge to three months' interest. Add a discharge fee, which at BMO can include the government registration fee and its own costs, and possibly an administration fee.

Getting a penalty estimate

If your lender is federally regulated, such as a bank, your mortgage agreement opens with an information box setting out your prepayment privileges and penalties, and the lender must explain how it calculates the penalty. Members of the Canadian Bankers Association have also agreed to:

• Offer an online calculator. BMO notes the results are estimates only.
• Answer by phone. They provide a toll-free number, and you can ask for a written statement of the charge.
• Put it in writing. Once you confirm you are paying off all or part of the mortgage, they give you a written statement of the charge, how it was calculated and how long it is valid.

Have your contract, cost of borrowing disclosure and latest annual statement handy. Ask for the penalty, the discharge fee, whether porting avoids the penalty, and whether a charge paid when your sale closes is refunded once you port. CIBC says it may waive or reimburse the charge when you port.

Letting your buyer take over your mortgage

With an assumable mortgage, your buyer takes over your rate, balance and remaining term, so you don't pay a penalty. FCAC says this is typically available on most fixed-rate mortgages, but not on variable-rate mortgages or home equity lines of credit. It can appeal to buyers when your rate is below current rates, though the buyer still has to cover the rest of the price.

• The lender has to approve the buyer. CIBC and BMO both say so.
• Ask to be released. Under BC's Property Law Act, you generally stay personally liable until three months after the current term ends, and longer if the lender demands payment in writing within that time, unless the lender approves your buyer in writing. Have your lawyer or notary request that approval within three months after the sale completes; the lender can't unreasonably refuse.

When your dates don't line up

If your purchase completes before your sale, bridge financing can cover the gap. At TD, it typically runs up to 90 days, you need your sale and purchase agreements, and the rate is similar to an open mortgage, often higher than you are used to. CIBC says a bridge loan usually needs a signed, unconditional sale, and you may still need one with its reverse port, for example for your down payment or closing costs. I explain how to line up the two deals in Buying and Selling at the Same Time.

Comparing your options: an example

Say you owe $500,000 with 30 months left on a five-year fixed term, and your next home needs a $650,000 mortgage. These are example figures, compounded semi-annually over a 25-year amortization, with a simplified penalty like FCAC's own example:

• Your rate is below today's rates. At an example 3.9%, with new terms at an example 4.6%, breaking costs three months' interest, about $4,875. Porting and blending gives about 4.06% on $650,000 and about $8,500 less interest over the 30 months, so porting comes out about $13,400 ahead.
• Your rate is above today's rates. At an example 4.9%, with new terms and the lender's comparison rate both at an example 3.9%, the IRD is about $12,500. Breaking for the lower rate saves about $12,100 in interest over the 30 months, so the two end up within a few hundred dollars, before fees.

The second case nearly cancels out because the IRD is based on the interest difference over the rest of your term, so breaking just for a lower rate generally pays only if you can get a rate below the lender's comparison rate. Look past the remaining term, too: a ported mortgage renews in 30 months at whatever rates are then on offer, while a new five-year term keeps its rate for longer. I explain what to weigh then in Renewing Your Mortgage.

Questions buyers and sellers often ask me

Can I take my mortgage with me when I move?

Often, yes, if your mortgage is portable. You apply, the lender approves the new home, and your rate, balance and remaining term move with you, usually without a penalty. Time limits vary, so ask before you set your dates.

What if my next home needs a bigger mortgage?

Many lenders blend your current rate on the existing balance with today's rate on the new money. You have to qualify for the extra amount, and fees may apply.

How much does it cost to break a fixed-rate mortgage?

Usually the greater of three months' interest and the interest rate differential. The IRD can be several times larger when rates have dropped since you signed, so ask your lender for the figure in writing.

Can my buyer take over my mortgage?

Sometimes. FCAC says most fixed-rate mortgages are typically assumable, but variable-rate mortgages aren't, and the lender must approve the buyer. In BC, you generally stay personally liable for at least the rest of the term unless the lender approves your buyer in writing, so ask for it within three months after the sale completes.

What if I have to sell because I can't keep up with the payments?

Talk to your lender as early as you can. Under the Canadian Mortgage Charter, the federal government expects federally regulated lenders, such as banks, to give homeowners at risk options to make lump-sum payments or sell their home without prepayment penalties. The Charter sets out expectations; it isn't law.

Planning a move? See what it costs to sell a home in BC, read the BC selling process from listing to completion, or try my mortgage calculator.

This article is general information, not financial advice. The examples use example rates, compounded semi-annually, with simplified penalty figures; they are illustrations, not quotes, and your own contract sets the rules. Lender terms are from their websites at the time of writing. For FCAC's guide, see prepayment penalties.