As real estate agent Geoffrey Grace began preparing to list a Scarborough, Ont., house for sale, he knew the major selling points would be the five bedrooms, 3,000-square-feet of living space and backyard pool.
Then the homeowner mentioned the 1.97-per-cent mortgage.
The seller’s mortgage with one of Canada’s big five banks is “assumable,” meaning that the next buyer of the home may essentially take over the loan. Why not offer that option as an enticement to buyers now that five-year fixed mortgage rates are creeping up on 6 per cent?
Mr. Grace of Re/Max Hallmark Realty Ltd. talked to the bank and delved into the fine print. The new buyer needs to clear many hurdles, including proving to institution that they have the financial means take on the debt.
“This is a situation that doesn’t benefit everyone,” he says. “That buyer is going to have to qualify and the lender has to like that person.”
The homeowners are moving to another property they own, so they have no need to transfer the mortgage to a new place. Mr. Grace figured offering the potential to assume the low-rate mortgage as a “bonus” in his marketing material would spark some curiosity at the very least.
It’s one of the 1980s-era game plans, along with the use of vendor take-back mortgages and portable mortgages, making a comeback after the Bank of Canada lifted its key interest rate to its current level of five per cent.
Mr. Grace entered the real estate business during the two-decade span when low rates were the norm, the market was generally strong, and a seller had no need to dangle an incentive.
He joined the family business after running errands for his mother, real estate agent Gail Grace, in her office as he was growing up. Ms. Grace recalls that such deals were sometimes put together in the late 1980s when some homeowners were facing rates as high as 18 per cent or so.
In the 1990s, the market entered a downturn and sellers had to shift their mindsets.
“It was a marketing tool you had in your tool kit,” she says of mortgage assistance. “If you weren’t getting the price you wanted, perhaps you could do something with your financing.”
So far, Mr. Grace has received a flurry of calls from real estate agents enquiring about the mortgage details for the property at 32 Ilfracombe Cres. near Warden Avenue and Ellesmere Road.
To protect the seller’s privacy, he is remaining tight-lipped unless he receives a written offer for the house with an asking price of $2.499-million. Only then will he discuss the specifics such as the amount of the mortgage loan, the time remaining on the term, the amortization and whether there is a cost associated with the transfer.
A buyer who wanted to make a deal contingent on the possibility of assuming the mortgage could make a conditional offer and only firm up after working out the details, he points out.
The buyer, in his opinion, will be more swayed by the property and the sale price itself than the chance to assume a mortgage.
“It’s a sweetener on the deal,” he says. “Someone’s not going to buy a house they don’t love just because the rate’s lower. But it might take the sting out.”
Mr. Grace has not noticed a swell of listings offering an assumable mortgage, but he notes that inventory is very low in Toronto. If more inventory comes on in the months ahead and the market becomes more balanced in some areas, the strategy may become more common.
He can imagine the practice working for sellers in the suburbs, for example, who might be willing to offer an assumable mortgage if it would help to distinguish their property from similar homes in the same sub-division.
Ms. Grace says there is some uncertainty in the market now because buyers aren’t sure if the July rate hike will be the last for a while.
She urges aspiring buyers and existing homeowners to make sure they can carry the property until rates stabilize.
“People have to be cautious about pushing their budget to the limits,” she says. “And don’t use the house as a bank machine. It’s your home to live in.”
Jason Georgopoulos, mortgage broker at Dominion Lending Centres, says he heard from concerned homeowners after the Bank of Canada’s recent hike of 25 basis points.
The prime rate, which many lenders use to determine rates for consumer loans and lines of credit, stood at 7.2 per cent in mid-July.
“I think the Canadian consumer has a bit of disbelief about how high things have gone and how quickly.”
A mortgage with a three-year fixed term has a rate of close to six per cent, he adds.
But despite the higher rates people are facing today, he says assuming a mortgage is not common practice because the buyer’s situation has to be just right.
The buyer can negotiate with the lender to borrow more, he says, but it will be at a blended rate or with a line of credit to top up the existing mortgage.
Also, lenders often require that the additional funds come from them.
“Your negotiating power is kind of limited on the rest of the money you’re going to borrow,” Mr. Georgopoulos says. “You’re kind of stuck with what they offer you.”
But all mortgages come with conditions and they vary greatly, he adds. For example, some lenders insist that closing dates line up exactly in order to port a mortgage from one property to another.
For example, some lenders insist that closing dates line up exactly in order to port a mortgage from one property to another.
Some changes also come with hefty fees and penalties.
Victor Tran, mortgage specialist with rates.ca, notes that an assumable mortgage means that the buyer is assuming the balance, years remaining, rate and amortization.
The criteria are very specific, he adds, and there are few scenarios where the deal works well.
“It’s a simple takeover,” he says.