Assuming a Seller's Mortgage When Buying in Ontario

Taking over the seller's existing mortgage can look attractive, especially if the seller has a rate you could not get today. It can also save the cost of arranging new financing. But an assumption involves the lender, both parties' obligations and tax consequences.

This article explains how assuming a mortgage generally works in Ontario, who is responsible afterwards, and what to settle before you sign.

What assuming a mortgage means

When you assume a mortgage, you take over the seller's loan instead of arranging a brand new one. It is different from porting, where the seller moves their own mortgage to their next home and keeps their rate and terms.

Not every mortgage can be assumed. Your first step is to ask the seller's lender whether the mortgage is assumable at all and on what conditions.

Lender consent and qualification

With an assumable mortgage, the lender must approve the buyer who wants to assume the mortgage, and lenders may charge a fee to assume it. What the lender looks at in approving you, such as income, credit and the property, depends on the lender, so ask for its requirements early.

• Ask for the lender's assumption requirements in writing.
• Ask whether any assumption fee applies.
• Ask for a statement of the current balance, rate, term and prepayment terms.
• Make your purchase agreement conditional on lender approval.

If the mortgage balance is less than the price, you will usually need other funds or financing for the difference. Any second financing involves its own lender and terms.

The seller's continuing liability

Whether a seller is still responsible for the loan after the sale is something to understand before anyone signs. How this applies depends on the lender and the documents, so it is worth confirming with a lawyer. In some provinces, the seller may remain personally liable for an assumed mortgage after the sale, although some lenders release the seller once they approve the buyer. Whether a release is given depends on the lender, so a seller should ask for it in writing.

The Mortgages Act also deals with this. Where a buyer is obliged by express covenant or otherwise to indemnify the original mortgagor, the mortgagee may recover the mortgage debt directly from that buyer, despite any contrary stipulation. The original mortgagor is the person personally liable through privity of contract with the mortgagee.

There are limits. The lender's right to sue the buyer ends when that buyer registers a transfer of the equity of redemption to someone else, unless an action was already started. Once the lender recovers judgment against either the original mortgagor or the buyer, it can no longer recover from the other under this section.

Land transfer tax and other costs

The value of consideration for Ontario land transfer tax includes the purchaser's share of any mortgage taken over. For example, buying a 33% interest in mortgaged land includes 33% of the principal still owing under the mortgage plus accrued interest to the date of the conveyance.

There is an exception for estates: where land passes to a sole beneficiary and is subject to a mortgage, the mortgage does not form part of the consideration.

If more than one person is taking over the loan, remember that someone who co-signs a mortgage or loan becomes a joint borrower and is equally responsible for repaying the unpaid balance.

What to do next

• Confirm with the seller's lender that the mortgage is assumable.
• Get the lender's approval requirements, fees and timelines in writing.
• Ask whether the seller will be released, and get any release in writing.
• Have a lawyer review the assumption documents and your indemnity to the seller.
• Ask about land transfer tax before setting your budget.

If the home is a matrimonial home and either side is married, spousal consent rules may apply to any new mortgage or encumbrance, so raise this with your lawyer at the start.

Frequently asked questions