What Is an Assumable Mortgage? Selling a Home With an Assumable Mortgage in Alberta

What Is an Assumable Mortgage in Canada?When it comes to selling your home in Alberta, having an assumable mortgage can be a unique selling point to attract potential buyers. Selling a home with an assumable mortgage allows the buyer to take over the seller's mortgage under the same terms, which can be particularly appealing in a market where interest rates are high or on the rise. Let’s explore how an assumable mortgage works, what benefits and drawbacks to account for, and how sellers can leverage this feature to potentially expedite their home sale. 

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

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What Is an Assumable Mortgage?

Assuming an existing mortgage allows a homebuyer to take over the current owner's mortgage terms. Essentially, the mortgage (and its interest rate) is being sold along with the property. It’s a very specialized form of financing that isn’t very commonly used in Canada, but it can excel in the right circumstances.

Depending on the current owner’s equity in the home, the “down payment” made by the buyer can vary. The buyer is responsible for paying the difference between the outstanding mortgage and the home’s value.

For example, if the purchase price is $800,000 and the home has a remaining mortgage balance of $500,000, the buyer must pay $300,000 to the seller upfront (or work out a payment plan with the seller). This is a much larger amount than the usual 20% down payment of $160,000 on an $800,000 home, and may even require the buyer to take out a second mortgage. On the other hand, if the seller has very little equity in the home, such as when selling a house soon after buying, the buyer may be able to purchase a home with much lower out-of-pocket expenses.

By assuming the mortgage, the buyer can skip the hassle and fees of applying for a new mortgage and instead step into the shoes of the previous owner regarding the loan. This is particularly advantageous when the existing interest rate is lower than the current mortgage interest rates, potentially saving borrowers money in the long run.

Sellers, on the other hand, might find assumable mortgages beneficial as they can be used as a selling point if the interest rates are advantageous, attract a different pool of potential buyers, and avoid prepayment penalties on the mortgage.

However, keep in mind that obtaining lender approval is required for a successful assumption of the mortgage.

Which Mortgages Are Assumable?

In short, an assumable mortgage is any mortgage that the lender will allow another borrower to take over. If a mortgage lender isn’t willing to let the mortgage be assumed, they will have a clause in the mortgage contract saying so. Generally, assumption clauses in mortgage contracts specify either that the mortgage cannot be assumed without the new buyer qualifying for the loan, or that the mortgage must be paid out upon the sale of the home (and thus can’t be assumed).

In general, subject to lender approval, most fixed-rate mortgages in Canada can be assumed, while variable-rate mortgages and home equity loans cannot.

If you’re interested in selling your home with an assumable mortgage, start by asking about the option with your lender.

Pros & Cons of Selling With an Assumable Mortgages

When considering selling with an assumable mortgage in Canada, you should weigh the pros and cons carefully within the context of the current real estate market and your financial situation.

Seek guidance from real estate and financial professionals to navigate this process effectively.

Advantages

Sellers benefit from attracting a different pool of potential buyers with assumable mortgages due to the appeal of low-rate loans. By offering an assumable mortgage, sellers can make their property more attractive to buyers looking to take advantage of favourable interest rates. This can lead to a quicker sale and potentially a higher selling price. Additionally, sellers can avoid mortgage prepayment penalties by allowing buyers to assume their mortgage.

Buyers, on the other hand, can benefit from assuming a mortgage when current interest rates are higher than the original loan's rate, providing them with significant savings over the life of the loan. They can also avoid paying fees related to creating a new loan.

It's essential for both parties to carefully consider the terms and conditions before proceeding with an assumable mortgage transaction.

Disadvantages

One major potential drawback for opting for an assumable mortgage when selling a home in Canada is that sellers can be made liable if the new borrower defaults on the assumed mortgage. Mortgages are a property lien; if the buyer is financially irresponsible and the house doesn’t later sell for enough to cover the mortgage, the lender can legally require you to pay the difference as the original borrower. If you’re concerned about this possibility, pursue a release request from your lender that will release you from potential liability.

Buyers interested in assuming the existing loan might encounter challenges such as needing a substantial down payment or a second mortgage.

While sellers might avoid prepayment penalties by allowing assumption, they could still be at risk for financial consequences if the new borrower damages the property or fails to make payments. Evaluate these factors carefully before deciding on an assumable mortgage for selling your home.

Should You Sell Your Home with an Assumable Mortgage?

Selling your home in Canada with an assumable mortgage can be a beneficial option for both sellers and buyers in the right circumstances, saving money and streamlining the closing process.

However, it's important to carefully consider the terms of the assumable mortgage and ensure all parties are well-informed. Seeking guidance from real estate professionals can help make the transaction smoother and more efficient.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

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