Household debts and taxes keep rising — it’s high time you weighed an assumable mortgage vs new mortgage. Don’t be chagrined if you haven’t heard of assumable mortgages before. They’re a seldom used, but potentially perfect option.
Ontario’s home buying market changes almost daily. Waiting to jump in can take forever. An assumable mortgage vs new mortgage could just be the answer.
Here’s what to know about having an assumable mortgage vs new mortgage.
How to qualify for a new mortgage
Assumable vs new – what’s the difference?
When to pick assumable vs new mortgages
What Happens When You Assume a Mortgage Loan
Assuming an existing mortgage over getting a new one — the thought is tempting. The seller has a mortgage already, and you take it over. No fuss over finding and applying for a mortgage loan. You simply assume the original mortgage. The interest rate and terms remain the same until it’s time to renew.
Why it seems so easy. In reality, whether it’s a good idea to assume a mortgage can depend on the terms and conditions, and your financial ability to take on an assumable mortgage vs new mortgage.
You may be better off assuming a mortgage than refinancing if:
- lending rules change, such as requiring more down than you have
- interest rates for new mortgages are higher
- you are self-employed, or rely on commission or tips, making it more difficult to qualify for a new loan
- or the current mortgage more than covers the home’s fair market value, less your down payment.
Calculate if you can afford to buy a home.
Incidentally, most new mortgages are assumable, but you have to request it when you apply for the loan.
Qualifying for New Mortgages
Qualifying has seldom been easier or more complicated. How’s that for confusion?
Your lawyer’s role in mortgage transactions.
To start with, you’ll need a gross debt service ratio of 39% and total debt service ratio of 44% to qualify for high ratio mortgages (mortgages with less than 20% down).
Your GDS ratio is…
- Projected monthly housing expenses divided by gross monthly income
- Mortgage payment, heating costs and property taxes
- Plus half of any condominium corporation fees.
Your TDS ratio is…
- Housing expenses, plus total monthly debts, divided by gross monthly income
- Debts include credit card payments, car or other loans
- Spousal or child support
- And other monthly expenses you regularly pay.
What You Need Down
Unless you have 20% or more down, a high ratio mortgage or private lender are your best options. Even with a 5% to 19.9% down payment, your credit score will need to be acceptable. Typically, that means a score of at least 600, although private lenders may go lower.
Can you borrow a downpayment?
How an Assumable Mortgage vs New Mortgage Works
If getting a new mortgage isn’t what you want, assumable mortgages could be a contender. As long as you can satisfy the seller’s lender that you are creditworthy, you could take over the whole mortgage or a part.
Regardless of whether an assumable mortgage vs new mortgage is right for you, you’ll still have to satisfy a mortgage lender (the seller’s or your own) that you’re creditworthy. Since the lender bears the financial risk if you default, they’ll want to check your financial worth, job stability, credit score, and debt history.
Fees You Could Pay
Be aware you’ll pay lenders’ fees for the paperwork involved, and could have a monthly mortgage insurance premium tacked on. Since you could be taking over the mortgage payments mid-term (maybe year two of a five-year mortgage), your amortization period may be shorter than the sellers’. Because of that, your mortgage payments may be higher.
When to Consider an Assumable Mortgage vs New Mortgage
Say, for example, a rowhouse you desire costs $650,000. You have 10% down ($65,000). The seller has a mortgage for the difference, or at least $585,000, with a better interest rate than is currently available for new mortgages. With the lender’s consent, you assume the mortgage payments. The seller hands you the keys.
Scenario #2: You see a home you like and apply for a new mortgage. The lender reviews your financials and, for whatever reason, declines your application. With little time left to find another lender, your other options are paying higher interest rates for a short-term or private mortgage. An assumable mortgage from a trustworthy family member or private seller, instead of mortgage lender, may be just the break you need to buy a home.
RRSP mortgage loan tips for Ontario home buyers.
Renewing or Refinancing an Assumable Mortgage vs New Mortgage
As long as you faithfully make the mortgage payments for the remaining term (six months to 10 years), you could improve your own credit rating. When it comes time to renew or refinance your assumable mortgage, mortgage lenders have reason to believe you are serious about buying a home. And because you started out with an assumable mortgage, your amortization term will be shorter.
Read more about assumable mortgages.
Where to Find Assumable Mortgages (Ontario)
Most realtors know homeowners who might be open to giving you an assumable mortgage, provided their lender agrees. You can find private sellers online or by checking local newspapers. Dropping into for sale by owner viewings can also open doors if you’re determined to find an assumable mortgage with terms you can manage. Ask a mortgage broker to do the math.
Private mortgage rules to know before you hire a mortgage broker.
Why You Need a Real Estate Lawyer
Assuming a mortgage has its own peculiarities. Axess Law real estate lawyers (Toronto, Ottawa and Greater Toronto Area) review the fine print for terms and conditions mortgage lenders typically include. We explain your legal obligations and tell you if an assumable mortgage binds you in ways you may not expect.
Discharging a mortgage in Ontario — the mortgage discharge fee and more.
If your current mortgage needs discharging, your Axess Law real estate lawyer can liaise with your bank, credit union or private lender. We finalize assumable mortgage documents or help you make private lending mortgage arrangements.
Home inspections can be troublesome. Axess Law words the home inspection clause (Ontario properties) to protect your legal interests — and explains why waiving home inspections in Ontario is a bad deal. Our licensed real estate lawyers negotiate with sellers’ lawyers to fix minor repairs or manage what happens to the deposit if the deal falls through.
Tips for wording the home inspection clause (Ontario).
When you’re finally ready to close a real estate transaction, our professional legal team does a comprehensive title search and registers the property title transfer (Ontario land registry offices). Axess Law takes care of all the legal details, from purchase or sale to taking possession.
What happens to the deposit when buying a house.
Affordable Legal Services for Assumable Mortgages
Access lawyers for less in Greater Toronto Area, Ottawa, or anywhere in Ontario when you buy, sell, or transfer property. Axess Law’s flat fee real estate lawyers are affordable, and our rates are all inclusive (excluding taxes, disbursements, and third-party charges). Axess Law offers you only the legal services you absolutely need. Your final invoice includes no surprises or hidden charges. Your itemized statement of adjustments is explained when we deliver it, and we answer any questions you have about it.
Book Now By Phone or Online
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