12 Jul What does it mean to “assume a mortgage”?
An assumable mortgage is a mortgage that may be transferred without changing the terms of the original mortgage. What does this mean? What does it involve? It is a financing agreement in which a seller transfers the terms, the interest rate and the remaining mortgage balance to a buyer. In other words, the person purchasing the house can avoid having to go through the process of getting their own mortgage if they assume the mortgage of the previous owner. By doing this, the buyer becomes legally responsible for the mortgage terms. However, it is important to remember that the original mortgage must permit assumption, and in most cases, the bank must approve the assumption as well as the person assuming the mortgage. In order for this to be done, the buyer needs to prove that he/she has sufficient assets and credit for the assumption to be approved.
What are some advantages and risks involved in a “mortgage assumption”? Perhaps the best advantage for the buyer with an assumed mortgage is the lower interest rate. If the original mortgage terms had lower interest rates than the market’s current rate, the buyer avoids the increase. For this reason, an assumed mortgage is more common when the interest rates in the real estate market go up. Another advantage is saving on the closing costs of the house and the fee for opening a new loan from a financial institution. On the other hand, there are some risks involved in this type of mortgage. First, the lender can still hold the seller personally liable for the mortgage, even after the latter has assumed the mortgage if he/she defaults on the loan. However, as of recently, CMHC has adopted a new policy that if an assumption takes place and the mortgage payments are kept current for 12 consecutive months, the seller would no longer be liable in the event of a default. Before that, the seller can still be responsible to make the payment.
Remember that while a quick sale and raised selling cost can be beneficial – by offering the assumed mortgage option, the seller can raise the asking price of the property -, a buyer can also lose out big. In transferring a mortgage over, the original owner would lose out on all the accumulated equity acquired by paying into the house in the previous years. The buyer needs to also verify that the seller’s mortgage is assumable, and that the lender will accept them as a new buyer.
If you have an interest in assumable mortgages, please do not hesitate to contact us.