You purchased your home four years ago and now want to sell and buy another that’s bigger and better. Your existing mortgage has a 5-year term before it expires and is portable. This means that the lender will allow you to apply the balance of your existing mortgage to your new home purchase. Without portability, you would have to pay a penalty for prematurely paying out the mortgage before the 5-year term expires.
As you are buying a more expensive home, you will need to add to your existing mortgage to finance the purchase. This is called a top-up. According to Gidia Molinaro, mortgage agent for Centum Omni Mortgage Corp., “The financing needed to purchase can cost you thousands more than it needs to. It all depends on how the mortgage is processed.”
Let’s use an example to drive home the point
The home you are selling was purchased 4 years ago for $220,000 with a down payment of 5% or $11,000. Anytime you borrow more than 80% of the purchase price, and by law, the mortgage needs to be insured. Usually, the insurance premium is added to your mortgage. In this example the 95% mortgage of $209,000 with an insurance premium of $6,583.50 amounts to $215,583.50.
In 4 years you sell your home, purchase another for $303,000 and port or apply the balance of your existing mortgage to help fund the purchase. You again purchase with 5% down, so you need 95% mortgaging which works out to $287,850. The outstanding balance on your existing mortgage being ported has reduced to $194,128. Don’t forget, this balance already carries the insurance premium with it. So you need an additional $93,722 (that’s $287850 - $194,128) to top up the financing needed.
Here’s where the new mortgage can cost or save you $1,000’s
It’s all in the one of two ways the mortgage is processed.
- First, it’s not uncommon for the person packaging your new mortgage to process it in the full amount of $287,850 plus the needed insurance premium of 3.15%. Using this approach you will be making payments on a mortgage of ($287,850 + $9067.28 premium) totaling $296,917.28.
- Alternatively, the person packaging your mortgage can ask the lender to process the mortgage under the top up program as follows: The $287,850 needed is made up of the $194,128 existing mortgage being ported plus the top up of $93,722.
Now a higher insurance premium of 4.9% (vs. 3.15%) is only applied to the top up portion. With this approach you will be making payments on a mortgage of ($194,128 + $93,722 + $4,592.37 premium]) totaling $292,442.37.
The premium using the 1st application method is $9,067.28. The added premium using the 2nd application method is $4,592.37. You save $4,474.91, and that’s not including the added savings in your amortized monthly payment. This could take two years off or your amortization.
All You Have to do is Ask.
As a borrower, according to Gidia, “The only way to insure that you get the advantage of the top up program is to ask whoever is handling your mortgage. It’s that simple.