A portable mortgage is a loan to purchase residential real estate that attaches to the borrower rather than to the property. Borrowers can transfer it to another house without having to apply for a new loan or incur additional fees. The terms of the mortgage stay the same despite the property transfer, providing an additional benefit to the borrower if interest rates are higher at the time of the transfer than they were when he purchased the first house.
Real property financing is specific to each country. The concept of a mortgage being “portable” has a somewhat different applicability in the jurisdictions that allow the practice. In the US, for example, a portable mortgage is a special type of loan that allows a borrower to pay a premium to be able to exercise an option at his discretion. Most mortgages in the UK contain provisions that allow the loan to be ported to another property under the same terms, but the buyer does not have an option that he can exercise. Lenders in the UK have discretion to allow a transfer under the same terms or not.
Portable mortgages are rare in the US, though they have been offered sporadically by banks, credit unions, and Internet-based brokers since 1987. Less than a handful of lenders in the entire country offer this type of mortgage at any given time. A portable mortgage is designed with a fixed term and interest rate. The interest rate will be up to a half percentage point higher than the rate of a conventional mortgage. This rate premium pays for the borrower's option to transfer the mortgage to a new house under the existing terms.
There are certain restrictions typically attached to the option. If a borrower is behind on loan payments or in bankruptcy, he cannot exercise it. The mortgage can only be transferred once and only to another single family home that will serve as the borrower's permanent residence. Borrowers cannot increase the amount of the loan, so if the new house is more expensive than the old house, the borrower has to make up the difference or obtain a second mortgage.
A portable mortgage can be beneficial under limited circumstances. If a borrower thinks he will want to buy a new house within a few years of purchasing the first, a portable mortgage may make sense but only if the interest rates on a conventional 30-year mortgage are expected to go up significantly in the future. The borrower is paying an interest rate premium every year for the benefit of making a one-time transfer. At a certain point, the cost of the additional interest will overtake what it would have cost to simply acquire a new mortgage for the second property. If the interest rates rise above the fixed rate of the loan, that differential ceases to matter.
