Assuming A Mortgage In Alberta: What You Need To Know

If you're looking to sell your home in Alberta, you may want to consider an assumable mortgage as a unique selling point to attract buyers. An assumable mortgage allows the buyer to take over the seller's mortgage under the same terms, which can be appealing if interest rates are high or on the rise. However, it's important to note that sellers can be held liable if the new borrower defaults on the assumed mortgage. This means that if the buyer fails to make payments, the seller may be responsible for repaying the mortgage. To avoid this, sellers can pursue a release request from their lender to waive potential liability. Buyers interested in assuming a mortgage may also encounter challenges such as the need for a substantial down payment or a second mortgage. Overall, while assumable mortgages can have benefits for both buyers and sellers, there are also risks and limitations that should be carefully considered before proceeding with any real estate transaction.

How do I assume a mortgage in Alberta?

Benefits of assumable mortgages

An assumable mortgage is a valuable financial tool that can provide buyers and sellers with a range of benefits. One of the most significant advantages is the potential for long-term savings due to lower interest rates compared to the current market average. This is especially beneficial when interest rates are high, as it can lead to substantial monthly and annual savings, reducing the overall cost of the home. For example, a 2.74% interest rate on a property can result in monthly savings of around $700, which adds up to approximately $9,000 per year.

Another benefit of assumable mortgages is the ability to skip the typical mortgage application process, saving time and money. Buyers can avoid the fees associated with securing a new mortgage, such as appraisal and credit check costs, potentially reducing closing expenses. Additionally, assumable mortgages can simplify the house-buying process, making it more manageable and expediting the transaction.

Assumable mortgages can also offer transferable benefits, such as the option to carry forward mortgage insurance or title insurance, further reducing costs and saving time. Moreover, sellers can attract a wider range of potential buyers by offering assumable mortgages, particularly in a market with high or rising interest rates. This can lead to a quicker sale and potentially a higher selling price.

While assumable mortgages offer these advantages, it is important to carefully consider the pros and cons within the context of the current real estate market and one's financial situation. It is always recommended to seek guidance from real estate and financial professionals before making any decisions regarding assumable mortgages.

Drawbacks of assumable mortgages

Assumable mortgages can be a great option for both homebuyers and sellers, but they also have certain limitations and drawbacks. Here are some of the drawbacks of assumable mortgages:

Limited selection and negotiating power: Not all mortgages are assumable, so buyers may have a limited selection of homes to choose from. Buyers may also have limited negotiating power when it comes to the terms of the mortgage, as they will need to accept the existing mortgage's terms.

Higher purchase price: Sellers may charge a premium for an assumable mortgage, resulting in a higher purchase price than with a traditional mortgage.

Potential liability for the seller: In some cases, the seller may remain liable for the mortgage if the buyer defaults on the payments. This is known as a "due-on-sale" clause, and it is important for both parties to understand this clause before agreeing to an assumable mortgage.

Larger down payment: Buyers must pay the difference if the existing mortgage is less than the sale price of the home, which may result in a larger down payment or the need for a second mortgage.

Qualification requirements: Buyers must still qualify for an assumable mortgage, just as they would for a new mortgage. The lender will review the buyer's income, credit history, and employment status to ensure they can make the payments.

Overall, while assumable mortgages can provide benefits such as lower interest rates and increased savings, it is important for both buyers and sellers to carefully consider the potential drawbacks and limitations before proceeding with this type of mortgage transaction.

Who can assume a mortgage?

In Alberta, anyone can assume a mortgage as long as they qualify for the loan. This means that the buyer assuming the mortgage must meet the mortgage lender's requirements for income and debt. The buyer will also need to pay the difference between the remaining mortgage amount and the price of the home, which can be a significant amount.

It is important to note that not all mortgages are assumable. Some lenders may specify that the mortgage must be paid out when the house is sold, which means it cannot be assumed. Additionally, there is a risk for the original borrower if the new borrower defaults on the loan. The lender can hold the original borrower responsible for the mortgage and, if the home cannot be sold for enough money to pay back the mortgage, the original borrower could be sued for the shortfall.

If you are considering assuming a mortgage in Alberta, it is important to seek guidance from real estate and financial professionals to navigate the process effectively and understand the risks involved.

On the other hand, sellers in Alberta can benefit from offering assumable mortgages as it can attract a different pool of potential buyers and avoid prepayment penalties. It is a good idea to discuss your options with a mortgage broker before putting your home on the market.

How to assume a mortgage

An assumable mortgage is when a lender allows a new borrower to take over the payments of an existing mortgage without changing any of the terms of the mortgage. This can be beneficial to the seller as it may increase the selling price of the home and provide a wider pool of potential buyers. It can also be beneficial to the buyer as they can save money on interest and avoid the hassle of applying for a new mortgage.

However, it is important to note that not all mortgages are assumable. Some lenders may specify that the mortgage must be paid out when the house is sold, and variable-rate mortgages typically do not qualify as assumable mortgages. If you are unsure, it is best to ask your lender whether your mortgage is assumable.

If you are a buyer looking to assume a mortgage, you must go through the standard mortgage application process, including getting pre-approved, having an appraisal done, and completing the closing process. You will also need to pay the difference between the remaining mortgage amount and the price of the home, which can result in a higher-than-typical down payment. It is important to carefully review the terms of the assumable mortgage and ensure you understand the potential risks, such as being held liable if the new borrower defaults on the loan.

As a seller, there are also risks to consider when allowing a buyer to assume your mortgage. In Alberta, you can be held responsible for repaying the mortgage if the new owner defaults or fails to make their mortgage payments. This means that even after the sale of your home, you could still be pulled back into that debt. To protect yourself, you can pursue a release request from your lender to release you from potential liability.

Liabilities and risks of assuming a mortgage

Assuming a mortgage in Alberta has its own set of liabilities and risks that need to be carefully considered. One of the major risks is the potential liability for the seller if the new borrower defaults on the assumed mortgage. Mortgages are a property lien, and if the buyer is financially irresponsible, the seller may be held responsible for paying the difference if the house is sold for less than the mortgage amount. This could result in significant financial losses for the seller.

To mitigate this risk, sellers can pursue a release request from their lender to waive their potential liability. Obtaining a release in writing, notarized, and registered, can protect sellers from being held liable if the buyer defaults. Another risk to consider is the possibility of overpaying for the property due to an inflated asking price. The buyer inherits any unknown issues with the property, which may result in unexpected costs or liabilities.

Additionally, assuming a mortgage in Alberta may require a substantial down payment or even a second mortgage. This is because the buyer must pay the difference between the remaining mortgage amount and the sale price of the home. The down payment for an assumable mortgage can be significantly higher than the typical down payment percentage, increasing the financial burden on the buyer.

Furthermore, assuming a mortgage requires the buyer to meet the lender's eligibility requirements, including creditworthiness and financial qualifications. The buyer must also be approved by the original mortgage lender, and not all lenders or mortgages allow for assumption. Variable-rate mortgages and home equity loans, for example, typically cannot be assumed.

While assuming a mortgage can offer benefits such as lower interest rates and a streamlined approval process, it is important to carefully weigh these advantages against the potential liabilities and risks involved. These risks include the possibility of default by the new borrower, unexpected costs associated with the property, and the requirement for a substantial down payment.

Frequently asked questions