Assumable mortgages:

When it comes to unique financing options, assumable mortgages can be a valuable tool for both buyers and sellers.

This type of mortgage allows a buyer to take over the existing mortgage terms from the current owner—meaning they not only purchase the property but also "inherit" the mortgage’s interest rate and payment schedule.

While assumable mortgages aren’t widely used, understanding their advantages and considerations can help you guide your clients toward informed decisions.

What is an assumable mortgage?

An assumable mortgage is one that the lender allows to be transferred from the seller to the buyer. If a lender permits this, it’s often stated in the mortgage agreement. In Canada, most fixed-rate mortgages can be assumed with lender approval, but variable-rate mortgages and home equity lines of credit typically cannot.

When advising sellers considering this option, encourage them to speak to their lender first to confirm the terms and assess any restrictions.

Advantages for buyers and sellers

For sellers, an assumable mortgage can be a selling point, attracting buyers interested in taking advantage of a potentially lower interest rate. This can make the home more appealing and may result in a quicker sale at a higher price. Additionally, sellers might avoid prepayment penalties associated with paying off the mortgage early.

For buyers, assuming a mortgage can offer significant savings if the current interest rates are higher than those on the existing mortgage. Buyers also save on setup fees typically incurred with new mortgages. This type of financing can be a strong option for clients looking for more affordable payments over the long term.

Important considerations and risks

As with any financing arrangement, assumable mortgages come with risks and considerations that both parties need to understand:

Seller responsibility: Sellers could remain partially liable if the new buyer defaults on payments after assuming the mortgage. Encourage sellers to discuss a release from liability with their lender to ensure they’re protected.
Buyer’s down payment requirements: Buyers may need to come up with a larger down payment, depending on the home’s current equity. If a home is valued at $750,000 but only has $450,000 remaining on the mortgage, the buyer would need to cover the $300,000 difference. In some cases, they might even need a second mortgage to meet this gap.

For example, if a buyer is considering a property with minimal seller equity (perhaps the seller recently purchased it), they may face lower upfront costs. This can make assumable mortgages an accessible option for some buyers, but it’s essential to clarify these details before proceeding.

Navigating the assumption process:

Both parties to review the mortgage terms carefully and seek lender approval early in the process. 

Sellers often want to highlight every appealing feature of their home to potential buyers, and offering a low-interest-rate mortgage can be a strong selling point. However, since assumable mortgages require lender approval, they aren’t a guaranteed feature. This option should only be mentioned in the private remarks, with a note that conditions apply.

To learn more about the ins and outs of mortgages, check out the Mortgage Know-How section of CREB®'s Webinar Library.