When we deal with our mortgages, there are three terms that we all come across: prepayment, portability, and assumability. They look like words we recognize, but in the finance world, they’re different than what you might think. So let’s go over them.

Prepayments

A prepayment is the payment of a bill or expense that settles the account before it becomes due. The nice thing about mortgage prepayments is that they allow you to pay off your principal faster meaning less future interest and faster total repayment.

Prepayments are something to ask your broker about because each lender is different. You might want to make an increase on your prepayments meaning you pay a little more each week or month depending on your payment schedule. You can also make a lump sum payment. Maybe you got a holiday bonus from work or a cash gift from a relative. You can throw that on your mortgage and get your debt paid quicker.

Portability

Portability means that you can sell your home and take your mortgage to a new home. One thing to remember about portability is that we can’t decrease the mortgage but we can increase it (often through a second mortgage or mortgage extension). Portability gives you the flexibility of being in control of where you mortgage is going and not having to break your mortgage every time you move.

Moving a mortgage to a new property avoids annoyances like discharge fees, legal costs, and the very real possibility of incurring a higher interest rate. Portability allows you to keep your (presumably good) interest rate for its full term rather than having to break and pay penalties halfway through.

Assumability

An assumable mortgage allows a mortgage and its terms can be transferred from the current owner to a buyer. By assuming the previous owner’s debt, the buyer can avoid having to obtain their own mortgage.

Assuming a mortgage happens most often with parents and their children. Say your parents have a mortgage and you move into that house. Rather than you going out and getting a new mortgage and making your parents pay discharge fees, you can assume their existing mortgage. All you have to do is apply. One thing to note is that you still need to be approved on the mortgage’s remaining balance by a financial institution just like you would on any other mortgage.

There are some big changes to mortgage lending rules that have taken effect on January 1^st, 2018. These rule changes impact both existing mortgage holders and those seeking mortgages. Here are some key points everyone should know.

What’s the big change?

New mortgage guidelines require lenders to vet applicants with down payments of 20 percent or more by subjecting them to a stress test. Applicants must prove if they can afford their mortgage payments if interest rates were raised two percentage points.

Stress tests are already mandatory for mortgages with less than 20 percent down payment. The rules, which are meant to ensure that Canadians don’t take on too much mortgage debt, effectively reduces the size of mortgages that borrowers can get by 20 percent.

How will this impact us Canadians?

• New rules could disqualify up to 10 per cent of prospective home buyers who have down payments of 20 percent or more according to the Bank of Canada.
• There should be a cooling down of home purchases country-wide, but particularly in real estate hot spots like Toronto and Vancouver.
• Between now and the end of 2019, as many as 200,000 homeowners will fail the stress test at the time of their mortgage renewal.

Credit unions are not affected.

January’s new rules and stress tests do not apply to credit unions, which are regulated at the provincial level rather than federal level. By using a credit union in 2018, homebuyers can sidestep the stress test and get a larger mortgage.

I’m pre-approved for a mortgage in late 2017. What should I do?

Some lenders have confirmed they will grandfather existing preapprovals under the 2017 lending rules for up to 120 days. However many lenders will not – for them Jan. 1, 2018 is a hard stop on old lending rules. Some lenders have not announced their policy on the matter at all.

Your best bet is to pick up the phone and call your mortgage broker to ask them where your preapproval stands.

I already have a mortgage. How does this affect me?

Adding new money, or moving the mortgage to a new property will trigger a re-evaluation under the new rules, stress test and all. Don’t change your mortgage if you don’t have to!

Who is safe from the stress test?

You’re safe if you’re simply renewing your current balance. None of these changes will impact you if you are renewing your mortgage for the same amount with the same lender.