Is The “Assumable Mortgage” Ready For A Comeback?
March 21st, 2006, Twitter CEO Jack Dorsey sent out this Tweet:
Somewhat unspectacular, wouldn’t you say?
But nearly fourteen years later, in December of 2020, Jack Dorsey created a Non-Fungible Token (NFT) out of this Tweet, which was his first ever on the platform.
What the hell does that actually mean?
Well, he created a digital file of this Tweet that would be stored on a blockchain.
What the hell does that actually mean? Don’t get me started…
March 22nd, 2021, that 5-word Tweet, turned into an NFT, sold at auction for $2,900,000 USD.
No joke. Read the article HERE.
As crazy as all this sounds, that’s not even the crazy part of this story…
The buyer of this NFT, Iranian crypto entrepreneur, Sina Estavi, put the NFT up for auction on April 5th for 14,969 ether, which is valued around $50 Million.
The current bidding?
Some of you who are more familiar with the story might suggest that this was all just a publicity stunt by Mr. Estavi, and that a $50 Million asking price is so comical that it can’t be real.
But the point I’m trying to make today is that you can seemingly make a market out of anything.
Oh, trust me, anything.
Did you play The Legend of Zelda as a child on your Nintendo?
This game debuted in 1986 and it remains my all-time favourite. Every 2-3 years, I get out a working 1984 N.E.S. and play Zelda from start to finish, by memory. I can beat the game in under four hours. Having said that, I wouldn’t even know how to work a video game controller from 2022…
As fun as The Legend of Zelda was, did you ever think that one day, lunatics would be making a “market” for mint condition copies of the game cartridge in the original box?
Check this out:
The Legend Of Zelda – Sold $870,000 – July 9, 2021
That’s an original game cartridge, graded a 9.0 by WATA, which not only sold for $870,000 last year, but which is now being offered for sale again at a reasonable $1,305,000.
For a goddam video game!
You can make a market out of anything.
Now, why am I saying all of this?
Because it’s a shot across the bow to anybody that is going to suggest an assumable mortgage is not a commodity that can, or will, be bought and sold with regularity in the coming months.
Any product, service, or imaginary digital token stored in an imaginary place, can be traded on a market if two things are present: 1) Supply, 2) Demand.
If there’s a rare edition of a 1987 video game that’s graded a 9.0, and there’s a person out there who values this game and would consider purchasing it, then there’s both supply and demand, and thus we have a market.
So what if a buyer of a house could save $50,000 per year on mortgage interest? And what if that savings could be conveyed in a sale?
As has been widely discussed, the Bank of Canada raised the overnight lending rate by 50 basis points last week, on the heels of a 25 basis point increase last month. There are rumours that another 50 basis point hike is coming.
The 5-year, fixed-rate mortgage isn’t affected by the overnight lending rate, but rather the variable is.
Having said that, an increase by the BOC is going to have effects throughout the financial markets, and eventually, this will make its way into the mortgage market.
Mortgage rates are fluctuating every day, but let’s say that today we have the following:
Variable Rate: 2.79%
Fixed-Rate (5-year): 4.19%
A client of mine purchased a $3 Million home two weeks ago, closes in July, and will be on a 2.99%, five-year, fixed-rate mortgage.
Some mortgage brokers can hold a rate for 90 days, others for 120 days, and I’m not sure if this is still possible, but I do recall the days of 180-day rate holds.
My client, ever-excited about the 2.99% rate, is incredibly grateful that I set him up with my mortgage broker about six weeks ago. He sees this rate as an “asset,” and I don’t disagree.
So for those of you currently out there looking to buy, how do you feel about the 4.19%, 5-year, fixed-rate mortgage? More specificailly, and this is going to sting – how do you feel knowing that you missed the boat on 2.99% or even 1.99%?
Yes, 1.99%. Remember those days?
How about even lower?
Last year, I had a rate hold at 1.59% for a 5-year, fixed-rate mortgage as I was considering an investment property. I tried, lost, and eventually that rate expired! Rates fluctuate, rates go up. And eventually, I had to settle for a whopping 2.59% on a five-year, fixed-rate mortgage.
Did that sting?
I suppose, but it’s all relative in the end.
2.59% is dirt cheap if you want to compare to historic rates.
The only way that 2.59% does not seem cheap is if you compare to the stupid-low rates being offered the previous year.
So let’s say you’re one of these buyers out there shopping for a home and after the next interest rate hike, you’re staring down the barrel of a 4.79%, five-year, fixed-rate mortgage.
Again, I’d caution people against thinking this is “high,” considering my first mortgage in 2005 was 4.99% and our parents will regale us with stories of 21% rates. But this is high compared to rates in the last three years.
Now, what if you, through a stroke of magic, were able to secure a 1.49%, four-year fixed-rate mortgage, and forego that 4.79%, five-year rate that you had “secured” through your bank?
Would you take it?
Well, as you may have guessed from the topic of today’s post, I think there are a lot of existing mortgages out there that will be assumed in the next few years. I had this conversation over the weekend with one such client.
He purchased a house for $1,800,000 last year and secured a 1.49%, 5-year, fixed-rate mortgage.
He made a 20% down payment.
On a 30-year amortization, his monthly payments are $4,959.65.
Of those payments in the first year, an average of $3,199 is principal repayment and an average of $1,761 is interest.
For argument’s sake, let’s say he purchased this house today, for the same $1,800,000 price, and had to pay a rate of 4.14%.
His monthly payments would be $6,962.01.
Of those payments in the first year, an average of $2,075 would be principal repayment and an average of $4,887 would be interest.
Suffice it to say, the lower interest rate not only keeps monthly payments lower by $2,000, but there would be $3,000 less in interest paid.
The point I’m making here is not that a lower interest rate is good. I think we get that!
But rather, the point I’m making is now that he’s being transferred south of the border for work, and needs to sell his house, he has four years remaining on his mortgage at a very attractive rate!
So can the buyer of his house, which is now probably worth $2,100,000, assume his mortgage and thus take advantage of the terms he secured last year?
That is, if the lender will allow it.
From my mortgage broker, Tony Della Sciucca:
In simple terms, an assumable mortgage is the transfer of the current mortgage loan agreement from the homeowner to the prospective buyer.
The idea of assuming someone else’s mortgage may seem like an attractive proposition for both parties, however, it gets a little more complicated than just assuming a new rate. Not only does the seller have to agree to this, but so too does the lender. And, like any loan agreement, you must qualify to assume the mortgage under its current terms with the existing lender.
So, what are some of the advantages for both the buyer and the seller? Well, for the buyer, they obviously inherit a very low rate, especially if the current interest rate environment is on the rise. And, more importantly, it’s the implied savings over the remaining term vs the out-of-pocket interest cost for a new mortgage.
For the seller, it can be used as a bargaining tool to sell their home for more, while avoiding breakage fees.
Sounds fair so far right….?
However, there are some potential risks to keep in mind as well, particularly for the seller. For instance, if the buyer defaults on the mortgage payments (typically in the first 12 months), the original mortgage holder could be liable for the payments by the lender as a result of the loan agreement being broken.
Also, the upfront cost to assume the mortgage may be out of reach. For example, If the sale price of the home is $2 Million, and the current owner has a mortgage of $1Million, the buyer would have to agree to pay the seller $1Million to assume/take on the $1Million mortgage.
In theory, the idea seems to make sense, but there are a lot of moving parts to qualify for this mortgage product.
Many of you don’t know this, and many agents themselves don’t even know this, but there’s a section on the MLS listing for information regarding mortgages.
Take a look:
This listing notes “Treat As Cleared” in the mortgage comments and that’s essentially what we saw in this section for twenty years!
Once upon a time, properties were being sold with mortgages attached, either beacuse the seller didn’t want to discharge the mortgage, or becasue the mortgage was attractive to the buyer, or both. Or maybe the seller would discharge the mortgage for the right price, but the mortgage details were included on ALL listings you found on the MLS.
Well, here’s my listing:
There’s nothing in there.
And that’s because this is no longer a mandatory field.
When you write, “Treat As Cleared” for the 9,000,000th time in a row, it seems like this section on the MLS listing no longer serves a purpose.
Those that lived through periods of exceptionally high interest rates in the 1980’s and 1990’s can tell you how important it often was to know what kind of mortgage was registered on a property.
I got into this business in 2004, and by that time, mortgage discharge penalties were low enough that sellers weren’t going to let a small fee get in the way of a sale.
Wait……mortgage discharge penalties?
What in the world are those?
From my mortgage broker, Tony Della Sciucca:
So, what are the types of discharge penalties and how are they calculated…? With most major institutions, there’s really two types; They include; three months interest or an IRD (Interest Rate Differential). And, with fixed rate mortgages, the penalty is always based on the greater of the two.
Three months interest discharge penalty is straight forward and easy to calculate. For example, if you have a 500k mortgage at a 3% interest rate, your penalty would be $3750. (500k * 3% /4 ). Most, if not all variable rate mortgages are calculated this way, which makes them such an attractive product. Regardless of when your term expires, you’ll know exactly what your penalty is going to be at any given time.
IRD penalty calculations can be very complicated and differ from lender to lender. These are the nasty ones.
Generally, IRD’s are based on the mortgage balance * difference between your current rate and the posted rate the lender can lend at today, for a term equivalent to your remaining term * the number of months remaining on your term / 12.
As cliché as this sounds, the lowest interest rate does not necessarily always translate into the best mortgage product. Be sure to thoroughly go through all your mortgage options before making your final decision, and always contact your lender for an exact penalty quote.
It seems to reason that there can be an advantage in the “assumption of mortgage” for both the buyer and the seller.
The buyer gets better terms and benefits from both lower monthly payments and less interest paid, and the seller avoids the discharge or break fees.
Believe it or not, those “Mortgage Comments” on the MLS listings that we don’t use in 2022 were actually very important back in the day!
Here’s a listing from 1989:
The prevailing rate back then was about 14%, so here’s a seller offering a very favourable 10.75% rate to any buyer that qualifies.
As I said, this was big back in the day, but has not been important for quite some time.
So can we see the “assumable mortgage” making a big comeback?
I think so.
In the coming months, my client is going to sell his house for $2,100,000.
There’s an existing mortgage on that house of just over $1,400,000.
At 1.49%, his interest cost is $20,860 per year.
A buyer looking to purchase this property, with a pre-approval for, say, 4.29%, is going to pay $60,060 in interest on that same $1,400,000 portion.
That’s $39,200 per year more than my client is currently paying to the bank.
There are four years left on this mortgage.
If a buyer were to assume this mortgage (via ‘blend-and-extend’ which I’ll explain shortly), the buyer would save over $240,000 in interest over four years.
Now, the house is going to sell for $2,100,000, or thereabouts.
The buyer, assuming a 20% down payment, will need a mortgage of $1,680,000, which is $280,000 more than the $1,400,000 left on my client’s existing mortgage.
This is where the buyer will look for the “blend-and-extend.”
This is simple math, folks. It’s a weighted average.
1.49% X $1,400,000
4.29% x $280,000
That’s the new rate for the buyer who is taking over the four remaining years on the mortgage, at 1.49%, for $1,400,000 of loan amount, when blended with the additional $280,000 of mortgage at the prevailing 4.29% rate.
If you wanted to actually extend into the full five years, you could do so, and many would. If you thought rates were going up in the next 12 months, then it makes sense to extend. Or, if you feel that rates will be higher in four years when your mortgage comes up for renewal, then again, it makes sense to extend.
But the bottom line is: the buyer for my client’s house is going to benefit from the four years of mortgage left. We are going to advertise this is an assumable mortgage and we believe that buyers out there will be more likely to purchase our listing than other comparable listings because of the $240,000 savings over the next four years.
Not only that, it’s conceivable that some buyers will extend their purchasing power for our listing based on the assumable mortgage.
If that’s the case for our property, then surely there are many others out there just like it which will allow buyers more affordability in the coming months and years when affordability is down.
If there’s a market out there for 1966 Beatles concert posters that sell for $275,000 USD, then surely there’s going to be a huge market for assumable mortgages in the city of Toronto as we navigate an environment of increasing interest rates moving forward…
The post Is The “Assumable Mortgage” Ready For A Comeback? appeared first on Toronto Realty Blog.