Assumable mortgages enable homebuyers to take over a seller’s existing loan, retaining the same interest rate, payment schedule, and remaining amortization schedule. For some buyers, this can mean significant savings if the seller locked in a lower rate a few years ago compared to what’s available on the market today.

Sellers may also benefit from offering an assumable mortgage, since it can make their property more appealing to buyers who are sensitive to borrowing costs. In the right situation, this option can create a win-win: lower financing costs for buyers and a stronger negotiating position for sellers.

Assumable mortgages can create a win-win situation where buyers save on financing costs and sellers attract stronger offers in a competitive market. Since assumable mortgages aren’t available in every case, it’s important to understand how they work, when they’re allowed, and the risks they carry.

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Key Takeaways

• An assumable mortgage allows buyers to take over the seller’s existing mortgage.
• Not all mortgages can be assumed by the buyer, and lender approval is required.  
• Assumable mortgages carry risks for both buyers and sellers.

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What Is a Mortgage Assumption in Canada

Mortgage assumability is a loan feature that allows a homebuyer to assume the existing mortgage on a property from the current homeowner. The buyer takes over the original mortgage, retaining the same interest rate, payment schedule, remaining term, and amortization. However, lenders will typically reset the interest rate while keeping the remaining term and amortization schedule if the mortgage being assumed is a variable-rate mortgage (VRM) or an adjustable-rate mortgage (ARM). Having a buyer assume the mortgage can be attractive if the seller is locked into a lower interest rate or has a substantial prepaymentpenalty to pay. If the market has shifted and interest costs have risen, assuming the mortgage allows the buyer to save on the financing costs of taking out a mortgage at a higher interest rate.

How Assumable Mortgages Work

The process starts when a buyer and seller agree to include the mortgage as part of the property sale. The buyer must apply to the lender and undergo the qualification process similar to that of any new mortgage application. The lender reviews the buyer’s credit, income, and debt service ratios before approving the buyer to assume the mortgage from the seller. If approved, the buyer takes over the seller’s remaining mortgage balance and term. Since most homes are worth more than the balance left on the mortgage, the buyer typically needs to make up the difference with a larger down payment or secondary financing to cover the remaining balance owed to the seller if there is significant equity in the home.

Which Mortgages Can Be Assumed in Canada

Not all mortgages are assumable. It will be outlined in your mortgage contract whether the mortgage can be assumed or if it must be paid in full upon the sale of the property. Standard charge mortgages can be assumed, whereas collateral charge mortgages, which allow home equity lines of credit (HELOCs) as an additional component, cannot be assumed. 

Since lender approval is required for a buyer to assume the mortgage, even an eligible mortgage may not be assumable in every case. It’s essential to check with your lender first to determine if your mortgage is assumable and to confirm any fees they may charge.

Pros and Cons of Assumable Mortgages

Assuming a mortgage can open the door to valuable savings for buyers and give sellers an edge in the market, but they also come with risks that both sides need to weigh carefully. 

Benefits for Buyers

• Lower interest rates: Buyers may secure a mortgage with a rate significantly below current market levels.
• Lower monthly payments: Carrying forward the seller’s rate can result in significant monthly savings.
• Qualify for more: Since the seller’s rate is likely lower, the stress test will be conducted at a lower rate, which can help buyers qualify for a larger mortgage.

Benefits for Sellers

• Avoid prepayment penalties: Sellers who are selling before the end of their current term won’t face penalties for breaking the mortgage early since someone else is taking over the existing loan.
• Stronger marketing tool: A home tied to a low-rate mortgage stands out in a competitive market or one where interest rates have increased significantly.
• Wider buyer pool: More buyers may qualify for the home if the monthly payments are lower under the assumed loan.

Cons for Buyers

• Larger upfront costs: Since the buyer must cover the difference between the selling price and the remaining mortgage balance, the required down payment can be substantially higher or require secondary financing.
• Qualification rules still apply: Buyers must pass the stress test and meet lender qualifying ratios, even when assuming a mortgage.
• Less flexibility: Buyers inherit the existing loan’s amortization, term, and prepayment options, which may not align with their long-term plans, reduce their qualifying amount, or result in a higher payment due to the reduced amortization schedule.

Cons for Sellers

• Ongoing liability risk: If the lender does not formally release the seller, they could remain responsible if the buyer defaults.
• Market limitation: In some cases, buyers may view an assumable mortgage as restrictive and prefer arranging their own financing, meaning the feature doesn’t always add value.
• No guarantee of approval: Even if a buyer is interested, the lender may decline them, forcing a shift back to conventional financing or finding another interested buyer who will qualify.

Risks of Assumable Mortgages

Sellers face a unique risk: unless the lender formally releases them from the covenant, they could remain on the hook if the new borrower defaults. This means sellers could be at risk of recourse if the buyer who assumes the mortgage misses any future payments and defaults on the loan. In some cases, if the bank forecloses on the home and there is a shortfall after the home is sold, the seller could be held liable for the difference. 

Depending on the terms of the mortgage contract, the seller’s liability may only continue until the buyer has made a certain number of on-time payments. For example, after a year of consistent payments, the lender may release the seller from liability for any future missed payments or default.

Assumable vs Other Financing Options

An assumable mortgage can be appealing due to the potential to secure a much lower rate, but this option should be weighed against other types of financing options available. The choice often depends on interest rates, the size of the down payment available, and how flexible the buyer or seller needs to be with the existing mortgage terms.

Vendor Take-Back Mortgages

With a vendor take-back mortgage (VTB), the seller of the property essentially acts as the lender, rather than a traditional bank or financial institution. The buyer will enter into an agreement with the seller, who will provide the financing to the buyer. The seller registers a mortgage against the property, transfers the title to the buyer, and maintains a lien on the property until the mortgage is paid off. These mortgages are typically used to bridge the gap when buyers are unable to qualify for the entire mortgage required to cover the property’s purchase price. 

Portable Mortgages

A portable mortgage allows the existing homeowner to transfer their mortgage to a new property without incurring prepayment penalties for breaking the mortgage. This type of loan feature is beneficial for sellers who plan to purchase a new home when selling their current home. Mortgage porting enables sellers to retain their existing mortgage with the same interest rate, term, and amortization schedule, essentially transferring it to a new property. 

Standard Financing

Standard financing refers to the buyer securing their own mortgage through a bank, credit union, or mortgage lender. This route is the most common and offers a range of products, allowing buyers to select the best rates and terms. While it may not come with the benefit of a lower rate, it provides a clean slate with no inherited terms, no risk of seller liability, and no restrictions tied to the seller’s existing mortgage contract.

Frequently Asked Questions (FAQ) About Assumable Mortgage in Canada

Final Thoughts

Assumable mortgages can offer a valuable advantage in today’s housing market, especially when the seller’s existing rate is far below what lenders are offering now. Homebuyers may find real savings in lower monthly payments, while sellers can use the feature as a tool to attract more offers and strengthen their negotiating position. Before making a decision, it’s wise to review how assuming an existing mortgage aligns with your broader financial strategy. 

Connect with a nesto mortgage expert to explore financing options and secure a mortgage plan that supports your unique circumstances.

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At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned, salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

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Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

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