With the rise in interest rates, buying a property through the so-called “acceptance” has become fashionable again.
Not so long ago, however, this concept got bad press.
Let’s look at the reason for the return of this unloved fad and how to use it if you want to resort to it.
What does “accept” mean?
The assumption of the mortgage loan is included in the purchase proposal.
For example, in 2020, Mathilde, a homeowner, took out a mortgage loan at an interest rate of 1.5% that will be amortized over 25 years with a 5-year term. Current balance: $350,000. Gabriel suggests that she buy the property for $450,000, broken down as follows: He takes over the mortgage loan from the bank and pays the difference to Mathilde, namely $100,000.
Why do you do it like that?
The advantage of the “accept” approach for the buyer is that they benefit from the interest rate that the seller receives when they sign the loan.
In our example, the 5-year term expires in 2025. Gabriel can therefore benefit from the 1.5% rate for another two years. Right now, interest rates are hovering around 6%, which equates to monthly payments of $2,239, while at 1.5%, they’re $1,399. A difference of more than $20,000 over two years!
In addition, this approach allows a reduction in notary fees, since the transaction is much simpler and the seller does not have to pay a prepayment penalty to his financial institution.
What are the disadvantages?
The main disadvantage concerns the seller, who remains responsible for the mortgage loan even though they no longer own the house. And that, even if the house is sold several times in the following years. As long as the bank that granted the loan does not issue a receipt, the liability remains.
In addition, if the seller wants to take out a loan in the future, creditors will take into account that he is responsible for this mortgage.
what are the steps
Line of Credit and “Takeover”
Financial institutions often offer customers “margin à tout” or “margin proprio” lines of credit based on mortgage guarantees.
A mortgage associated with such a margin, constantly changing its holder’s debt, makes it almost impossible to “take over”.
Finally
Although the operation comes with certain risks, it’s not uncommon for shoppers looking to save money to take action. Especially if it is a family member, a close relative or an acquaintance.
However, if it is a pure stranger, take precautions by running checks: income, employment, credit rating, etc.
Advice
- The seller can ask the financial institution to write a letter stating that they are no longer responsible for the debt after the sale. Please keep this document safe.
- The seller can include a clause in the contract obliging the buyer to receive a receipt if they resell the property.
- The financial institution can also cancel the seller’s mortgage and set a blended interest rate on a new mortgage for the buyer.
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