What is an Assumable Mortgage?
An assumable mortgage is a mortgage that can be transferred to a third party without changing the terms of the original mortgage. The seller will need to verify that the original mortgage is assumable while the lender will require approval of the buyer prior to the assumption.
With the current market conditions as they are, there’s a strong sense that assumable mortgages will be making their return, as featured by the financial post.
Advantages of an Assumable Mortgages?
When the market has more homes for sale than potential buyers, an attractive mortgage rate can help boost the appeal of a home and even have the seller get more than the listing price. In a buyer’s market, especially when mortgage rates are rising, low-rate mortgages provide buyers a built-in interest savings until the mortgage maturity. Even though a lender may charge a fee to complete the transaction, the closing costs on an assumed mortgage are likely lower than that of a new loan.
Risks of an Assumable Mortgage?
Although the buyer takes over the remaining payments on the mortgage and becomes legally responsible for the mortgage terms, the lender can still hold the original seller personally liable for the mortgage if the buyer were to default on the loan. However, CMHC has adopted a new policy that makes a seller of an assumed mortgage no longer liable if the buyer has made 12 consecutive monthly payments.
Assumable Mortgage options:
- The buyers assume the full mortgage and take responsibly of the mortgage fulfillment. A fee may be charged to the buyers to complete the assumption.
- If the buyer assumes only a portion of the mortgage, the remaining outstanding mortgage will need to be paid off by the seller possibly with a pre-payment penalty fee. A fee may be charged to the buyers to complete the assumption.
- If the buyer requires an amount higher than the outstanding mortgage balance they can apply to add-on to the existing principal balance for a new blended rate. A fee may be charged to the buyers to complete the assumption.