Moving.

If you are wanting to up- or down-size your home, and are doing so during your current mortgage cycle, there are a few things to keep in mind. The first, is that making any change to your mortgage during your mortgage term is considered “breaking” the mortgage.

Portability

If your mortgage is portable, moving up and scaling down will be much simpler. If you are unsure of the term, “porting” your mortgage refers to taking your existing mortgage (including your rates and terms) and transferring it from the original property to another. This can only be done if you’re purchasing a new property at the same time you’re selling your old one. However, unlike mortgage refinancing, porting does not require you to break your mortgage or pay penalties.

Consider The Penalties

Whenever you break your mortgage, there are penalties associated with that as it is a contract. Depending on the type of mortgage you have (variable vs. fixed-rate) and how much time is left (1-year, 2-years, etc.) will determine the level of penalty. Typically, these are calculated in one of two ways:

Interest Rate Differential:

In Canada there is no one-size-fits-all rule for how the Interest Rate Differential (IRD) is calculated and it can vary greatly from lender to lender. This is due to the various comparison rates that are used. However, typically the IRD is based on the following:

• The amount remaining on the loan
• The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today

Ideally, you will want to be aware of what your IRD penalty would be before you decide to break your mortgage as it is not always the most viable option.

Three Months Interest: 

In some cases, the penalty for breaking your mortgage is simply equivalent to three months of interest.A variable-rate mortgage is typically accompanied this penalty.

Re-Qualifying

If you are unable to port your mortgage, you would need to re-qualify for a new mortgage at the current rates offered by lenders and would be subject to government changes – including recent “stress test” rules.

If it has been a while since you bought your first home, you may be unfamiliar with the “stress test”. If you are purchasing a new home, with a new mortgage, it is important to understand what this test is as it is a requirement to qualify.

The Stress Test was originally introduced in October 2016 for insured mortgages (down payments of less than 20%), but as of January 1, 2018 this now includes all mortgages, regardless of down payment percentage. This test determines whether a home buyer can afford their principal and interest payments, should interest rates increase. It is based on the 5-year benchmark rate from Bank of Canada or the customer’s mortgage interest rate plus 2% – whichever is higher.

When it comes to moving on up, it can be extremely exciting – and rewarding – as long as you consider all the costs. When up-sizing, some of the costs to consider include:

• Costs to sell your current home
• Purchase price on the new home
• Property Transfer Taxes
• Realtor fees (typically 2.5-5% of the homes selling price)
• Home ownership costs

If you are moving up from a condo or apartment to a single-family home, you will save on strata fees; but it is important to realize that you will now be responsible for all of the maintenance of your home. To ensure financial success, it is a good rule of thumb to save one percent of your new home’s purchase price, per year, for maintenance. For instance, if you purchase a $600,000 new home then you would want to ensure $6,000 per year in savings.

Making the move to a larger home is both an exciting and daunting process – but it is entirely doable with the right preparation. 

Moving to a larger house is not the only time that things can change with your home and mortgage. Sometimes there comes a point when owning a home becomes a little too much to handle or maybe you’re an empty-nester and no longer need three extra bedrooms. Whatever the reason, downsizing is a great option when you no longer need a full-size home. Perhaps you want to swap your two-story family home for a rancher, or maybe a cute little apartment or townhouse! Just as there are many options for individuals looking to move on up or expanding families, there are just as many options for those individuals that are looking to scale down. 

For those homeowners who are fortunate enough to now be mortgage-free and looking to scale down, you could be sitting on a gold mine! 

Regardless of your current situation there are some costs that go with selling your existing home and moving to something smaller or more affordable. These costs include:

• Realtor commission fees, which range from 2.5 to 5 percent of the home selling price
• Closing costs and legal fees, which are 1 to 4% of the purchase price on the new home
• Miscellaneous costs such as moving expenses, upgrading appliances and/or buying new furniture
• If you are moving into a condominium or townhouse, there are potential strata fees to consider – even if you are mortgage free

Most individuals looking to scale down are looking to do so for retirement or because they are now empty-nesters. However, if you are looking to downsize simply due to being unable to manage your mortgage or maintenance costs, there is an option called a “Reverse Mortgage”. A reverse mortgage is a loan secured against the value of your home. It is exclusively for homeowners aged 55 years and older and enables the homeowners to convert up to 55% of the home’s value into tax-free cash! With a reverse mortgage, you maintain ownership of your home and can use the loan to cover costs or pay out debts. The loan would need to be repaid in the event that you choose to move and sell the current home.

Regardless of where you are moving on the property ladder – whether up to a full-size family home or down to a more comfortable condo – a Dominion Lending Centres mortgage professional can help you move on up the property ladder and ensure future financial success so you can continue living the life of your dreams!