An assumable mortgage is a financing arrangement whereby a buyer takes over (i.e. “assumes”) the current owner’s mortgage without changing any of the terms of the loan. As such, this arrangement allows a homebuyer to take over the principal balance, interest rate, repayment period and any other contractual terms of the current owner’s loan.
In a period of increasing interest rates in Alberta, the cost of borrowing associated with obtaining loans also increases. Therefore, if a current homeowner’s mortgage was taken out during a time of lower interest rates, it might make financial sense for a homebuyer to assume said loan. However, there is a tradeoff. Remember, purchasing a home and assuming mortgage in a high interest rate environment also generally increases the selling price – as the loan has now become more valuable. As such, the cost-benefit-analysis becomes more complicated.
Likewise, when doing a cost-benefit-analysis over assuming a loan, a homebuyer should also consider the existing balance owing on the loan. For instance, imagine if a buyer wants to purchase a home for $400,000.00 and the seller’s assumable mortgage has a remaining balance owing of $250,000.00. Unless the buyer has $150,000.00 in cash to pay to the seller, the homebuyer will need to take a second mortgage to secure the remaining funds. The terms of that second loan won’t be similar to that of the assumable mortgage. Rather, it will be influenced by the current state of the economy, which can mean a higher interest rate. Further issues can arise if the homebuyer must obtain a second loan from a different financial institution if both lenders don’t cooperate with each other. As such, assumable mortgages become more attractive when the seller’s equity in the property isn’t that high.
Similarly, there are benefits and disadvantages to assumable mortgages for sellers. As previously stated, selling a home and assumable mortgage in a high interest rate environment increases the value of the loan and the selling price. However, there are serious risks for sellers associated with mortgage assumptions. In cases a default by the new borrower, a lender can still come after the original borrower in order to get their money back.
That being said, the final decision on whether a mortgage can be assumed by a new homeowner is afforded to the lender. A homebuyer must apply to assume a loan and meet the lender’s requirements (i.e. qualifying) before the deal can be signed off by either party. Some mortgages though expressly forbid mortgage assumptions. Due to the challenges associated with assuming loans, mortgage assumptions have become a fairly uncommon practice in Alberta. However, if you’re still interested in assuming a loan the best place to start is to speak with your mortgage broker who can help guide you through the process.
If you have any questions concerning mortgage assumptions, please do not hesitate to contact Khemka Law or counsel of your choosing. We are always here to assist you. If want us to talk about a particular topic in our Thursday Tidbit program, please get in touch with us! Thank you for your time and consideration.
Sincerely,
Pranav Khemka
Pranav Khemka, Barrister & Solicitor
T: (403) 457-9577 | F: (403) 457-9578
E: pkhemka@khemkalaw.com
LEGAL: This Thursday Tidbit provides general information only and does not constitute legal advice. Circumstances may vary and no lawyer-client relationship is established from the use or reliance of this information. You are strongly advised to seek any legal advice by directly contacting Khemka Law or counsel of your choosing. Khemka Law does not warrant or guarantee the quality, accuracy or completeness of any information found within this Thursday Tidbit.