The Bank of Canada's gradual increase in the key interest rate has led to a series of increases in mortgage rates.
This reality, difficult for many, has brought back into fashion the assumption of a mortgage loan from the seller, a financing method that has practically fallen into disuse given the very low interest rates. What's the point of taking over a mortgage loan from the seller?
What is it exactly?
Taking out a mortgage means that the buyer takes over the balance of the seller's mortgage and (if necessary) takes out a new loan to make up the difference. This allows him to benefit from the lower interest rate that the seller received when purchasing the property or extending his mortgage. For his part, the seller does not have to pay a penalty for early repayment of his loan.
An example
Let's assume Stéphanie owns a home worth $500,000 that has a mortgage balance of $100,000 on a loan taken out two years ago with a fixed interest rate of 3.5% and a five-year term. As we know, tariffs have increased significantly since then. François, who wants to purchase the property, wants to benefit from the tariff that Stéphanie received. He offers to assume the balance of his mortgage of $100,000, plus an amount of $300,000 that he will finance with a new mortgage loan, whose interest rate is currently around 6.5%. His down payment is therefore 20% or $100,000.
Are there many French people in the world who want to buy a house using this technique, commonly called “mortgage assumption”, as the interest rate increases? Can new buyers also negotiate a blended interest rate by combining the seller's old interest rate with that of the new loan?
We asked seven financial institutions these questions. Five answered us.
Bank overview
– National Bank
“From our side, there are no particular fluctuations to report when a new buyer takes over the seller's mortgage. The interest rate remains unchanged.”
Stéphanie Rousseau, Senior Advisor, Public Affairs
– CIBC Canadian Imperial Bank of Commerce
“We allow a mixed mortgage rate.”
Josh Burleton, communications and public affairs
– BMO Financial Group
“The number of mortgage underwriting transactions has increased since 2022, but they still represent a very small share of total mortgage transactions.”
“When a customer agrees to assume the mortgage loan from another borrower, he or she agrees to the same mortgage terms (including balance, interest rate and type, prepayment terms and remaining term) of the original borrower's portion of the mortgage.”
Marie-Catherine Noël, Director, Media Relations
– Desjardins movement
“Desjardins does little in terms of mortgage underwriting (mortgage underwriting). We found no significant differences.”
“With this type of loan, the buyer retains the seller’s old interest rate until the original contract term.”
Chantal Corbeil, senior spokesperson, public relations
– RBC Royal Bank
“RBC allows mortgage underwriting. However, we encourage customers to contact us directly for tailored advice to support their decisions.”
Jessica Assaf, Senior Director, Regional Corporate Communications
Diploma
It appears that the use of mortgage transfers has not increased significantly despite the rise in interest rates. You're probably wondering why, because it's a great way to reduce your mortgage costs.
This is undoubtedly due to the nature of this type of financing, as the seller remains responsible for the loan even if he no longer lives in the house. If the new buyer defaults on payments, the financial institution turns to the original borrower.
For this reason, this financing method is still used mainly when there is a connection between the parties, such as members of the same family or close acquaintances.
Advice
- The seller who authorizes a transfer of the mortgage loan must request a release at the end of the term, otherwise he will always remain responsible for the obligation entered into.
- Taking out a mortgage can be of great benefit to a seller who is having difficulty selling or faces a hefty penalty in the event of a mortgage breach.