If you’re seeking to purchase a pre-sale home but are currently in the middle of an existing mortgage term, you may worry that you don’t have any options. However, there are a few ways to use an existing mortgage to your advantage. To finance your pre-sale purchase with a current mortgage, look at refinancing and at transferring.
When to refinance your mortgage
Each time you contribute to your mortgage, you are gaining an additional small piece of equity in your property. This equity can be leveraged to your advantage during refinancing, which allows you to access equity in your home, get a (potentially) lower interest rate and consolidate debts.
When you refinance your mortgage, you are breaking your existing mortgage and beginning a new one. Refinancing allows you to modify the terms from your original loan, such as term, interest rate or total amount. You replace your primary, original mortgage loan with a new loan that provides access to additional capital based on the additional equity you have accrued. You may then access these funds to put towards your pre-sale deposit.
Refinancing is also appealing to adjust your interest rates if current rates are lower than your original rate was. A lower interest rate can save a fair amount of money over time. You may also wish to consolidate all your varying debts into one loan, which offers the ease of one monthly payment. Often, this provides a more beneficial overall interest rate as high interest debts are consolidated into the lower interest rate of your refinance.
Breaking your existing mortgage early may result in a penalty fine, so it’s crucial to understand the repercussions of refinancing. Penalty fines will range depending on the details of your original mortgage. Understanding the numbers will help you decide if a refinance can save you money in the long run.
When to transfer your mortgage
Transferring, or porting, your mortgage may be a better option for you and your pre-sale purchase. Transferring your mortgage involves taking your existing mortgage (and all its terms) from one property to another. This is particularly applicable if you are moving your primary residence, as you’re only able to transfer your mortgage if you are selling one mortgaged property at the same time as buying your new pre-sale.
It’s quite common for the needs of the mortgage to change when being ported. For example, it’s likely that the price of the new purchase is higher than the price of the originally mortgaged house. In this case, a lender may offer a ‘blend and extend’ mortgage, which essentially averages out the existing mortgage and its rate with the additional funds required at the current mortgage rate.
If your existing mortgage rate has a lower rate than what is being currently offered, it would be advisable to port over that mortgage to your pre-sale home. This is one of the key reasons someone would choose to transfer rather than refinance. Unlike a refinance, transferring your mortgage does not result in penalty fines. Some lenders allow mortgage transfers, but some do not, and not all mortgages are portable. Talk to your broker to best understand your options.
As you explore your pre-sale purchase possibilities, it’s smart to look at all financing options. Nest Mortgages specializes in pre-sale home purchases and can provide thorough insight into the best solution for your needs. Once armed with information, you’ll be able to make the best choice for your pre-sale home.