Some people wish they could move, but hesitate to sell their current homes. They might be thinking:
“I’d gladly sell my home right now, if only I could shift the remaining 25 years of my 4%-interest mortgage to the next house I buy! (Oh, well.)”
“Giving up our 3% rate and getting a new mortgage at 6.9% is bumming us out. Why can’t U.S. homeowners have portable mortgage options?”
Who can blame them for wishing? Indeed, Canada, Britain, Australia and some EU countries offer portable mortgages as an option. These loans can be peeled off a borrower’s current home, and applied to the purchase of a different property.
What Stops the U.S. Mortgage Market From Allowing Portability?
If U.S. borrowers could port their mortgages when they move, wouldn’t that keep the housing market from getting stuck in ruts like we were throughout 2023? Quite a few people would sell if they knew they could keep the same mortgage rate and terms. And for home seekers, portability could make buying a home less risky. They wouldn’t be concerned that they could buy a home and get stuck, too, due to future interest rate activity.
Sounds good in theory. But U.S. lending doesn’t favor loan portability. When people move, U.S. lenders like to wrap up their home loans.
Why not just leave loans with borrowers as long as the borrowers want to stay in? Frequently noted reasons are:
- Investment funds buy up bundles of mortgage debt, underwritten against the value of specific homes. What if the homes could be swapped out? A whole new risk assessment would have to be made.
- The longer a loan’s life, the more significant the risk that a borrower has a change in circumstances and goes into default. So, the longer the loan, the greater risk a lender takes on. That’s why a 15-year mortgage has cheaper rates: shorter loan = lesser risk.
Advocates for a portability option observe that people are keeping their loans practically forever anyway and that’s exactly the problem!
In any case, because portability does create some extra degree of risk, lenders could decide to charge higher rates for portable loans. Therefore, portable loans could be surprisingly expensive.
In the standard U.S. mortgage, the home’s market value is at the core of the decision to approve a loan. In contrast, a portable mortgage approval is more about the strength of the individual applicant’s credit profile. In other words, the portable loan could potentially be harder to approve for struggling borrowers.
U.S. government-backed mortgages aren’t portable loans, but they are assumable loans. This means a lender-approved buyer may take over, or “assume,” the seller's mortgage on the same property. (In contrast, a portable loan moves with the seller.)
Portability Clause: Where It Exists, How Does It Work?
Canadians and some others may have the ability to take an existing mortgage and all its terms with them when they sell and move. If the mortgage agreement has a portability clause, then:
- The borrower can make a down payment on the next home with the current home’s equity, cash, or a combination of both. (Home equity equals the home’s fair market value, minus the borrower’s mortgage balance.)
- If the borrower needs more money for the next home, the portable mortgage can “blend and extend” with the additional financing, averaging the new (current) rate with the portable rate. The borrower gets the benefit of using the first mortgage to make a purchase with lower interest than the prevailing rate.
Notably, Canada uses variable-rate mortgages. When rates rise, the portable mortgage that has an earlier, lower rate is a very good asset to have. And the homeowner doesn’t have to cough up penalties for paying off the mortgage early. The mortgage stays in place, in the borrower’s name.
In contrast, a common feature of U.S. mortgages is the due on sale clause. The loan must be fully paid back for the deed to be transferred with a clear title. Freddie Mac and Fannie Mae require that feature, for loans that are repackaged for investors as mortgage-backed securities.
In short, countries that allow portability have different mortgage structures, so we can’t assume that portability would work here even if it works elsewhere. But the concept hasn’t gone unnoticed here. American Banker reports that the Mortgage Bankers’ Association, prodded by its members, has been looking into portable mortgages.
Assuming an FHA-backed mortgage is now a popular thing to do, as people seek outside-the-box ways transfer homes while saving money on financing. As Kyle Campbell of American Banker reported to Yahoo Finance, the average interest rate for existing FHA loans is a very appealing ~4%.
Could the United States Ever Accept Portability Clauses?
The U.S. Federal Reserve is working under high pressure to curb inflation and ultimately lower borrowing rates nationwide. People’s hesitance to sell their homes has kept supply down — making inflation in real estate extremely hard to tame. Inflation is very sticky right now, according to Freddie Mac. Would portability help?
The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, has said that portable mortgage options are not under consideration, according to the trade publication American Banker.
So, mortgage portability in the United States remains unlikely. Homeowners might like the thought of it, but it could come with new complications. Yet people do talk about portability when rates are high.
And that brings us to the core issue: the surge in borrowing rates that the housing market has experienced over recent months. This is keeping people from selling their starter homes when they’re ready to move. The result is a low housing supply that’s trouble for the U.S. housing market and for U.S. politics as well.
Ultimately, homeowners will face life changes and sell their homes, letting go of their very low-interest home loans. Some will buy other homes, and the hope is that interest rates settle down by the time an owner makes that decision. Well, the most effective rate-tamer is on its way, as long as inflation stays in check. That fix is a federal rate cut. If the Federal Reserve makes its moves with grace (and luck), mortgage rates will level down to a tolerable point in 2024. And that’ll make people a lot more portable.
Supporting References
Kyle Campbell for American Banker via AmericanBanker.com: Is Portability the Cure to the Mortgage Market’s Woes? (Nov. 24, 2023).
Angel Smith and Diane King Hall for Yahoo Finance Live (video transcript): Could Mortgage Portability Happen in the US? (interviewing Kyle Campbell of American Banker; Nov. 28, 2023).
Theron Mohamed for Business Insider (Insider Inc.) via BusinessInsider.com: How the Canadian Mortgage Model Could Help Unfreeze the Housing Market (Mar. 9, 2024; quoting Julia Fonseca of the University of Illinois Urbana-Champaign, Richard Martin of the University of Georgia’s Terry College of Business, and Susan Wachter of The Wharton School).
Barry Choi for NerdWallet Canada: Answers to Four Common Questions About Portable Mortgages (Oct. 19, 2023).
And as linked.
More on topics: Interest rates likely to go down in 2024, Buying a home in times of high mortgage rates
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