Mortgage Porting - Everything You Need to Know
Introduction: What is mortgage porting
To understand what mortgage porting is, let's start with an example. Suppose that a while back you bought a home with a cheap, great mortgage. Really great! Now you've decided to upgrade to a larger home. Say it's a bad time to take out a mortgage right now — the terms and interest rates are higher than they used to be. Fortunately, you can "port" (transfer) the good mortgage from your old home to the new one and keep enjoying it, instead of taking out a worse mortgage at today's terms.
This article covers every angle of mortgage porting: how it's done, the advantages and disadvantages, and general rules of thumb to help you decide whether porting your mortgage is the right move. Let's get started.
First, a quick, formal definition of mortgage porting. Recall that a mortgage is a loan granted against a lien on a property that serves as collateral. The collateral is usually the home being purchased. In mortgage porting, you swap the existing collateral (the old apartment you sold) for different collateral (the new apartment).
Technical: how mortgage porting is carried out
Before we get into the technical side, let's lay out the basic conditions for porting:
(a) You have sold your property.
(b) You have an existing mortgage that you have not yet closed, and you wish to port it to another property.
In this situation, you ask the bank that gave you the mortgage (hereinafter the mortgagee bank) for a letter of intent for porting, which you then pass on to the buyer.
The bank declares that if it receives the full mortgage amount by a certain date (this is the validity period of the letter of intent), it will release the lien from the seller's property.
You must make sure you are receiving a letter of intent for porting, not for payoff.
A letter of intent for payoff is issued immediately (almost — subject to the slowness of banks).
A letter of intent for porting sometimes requires submitting an application for principle approval — because the bank has to verify that the new property can "receive" the old mortgage (a question of LTV).
The buyer will deliver the letter to their mortgagee bank, which will transfer the required amount to your bank. Now, because the letter of intent is for porting, the funds received are transferred to a porting deposit. This means that the bank's collateral is no longer the apartment you sold, but rather the bank's porting deposit.
As far as the mortgage terms and payments go, nothing has changed. You keep paying the mortgage as usual on exactly the same terms. Each payment now draws down the amount accumulated in the porting deposit.
If you sold the property and already have a new home that you purchased, the bank will transfer the mortgage from the existing property directly to the purchased property (i.e., the mortgage will not pass through a porting deposit).
Note! Transferring the mortgage to the new property takes time. It's a full collateral stage in every sense.
Once you find the new home you are interested in, the bank will transfer the funds in the porting deposit to the seller of the new home and register a legal note (caveat) on it. The bank's collateral has now moved from the porting deposit to your new home. You continue paying the same mortgage under the same terms as before. That's it! Congratulations — you have completed your mortgage porting.
If you don't find a home, then after a set period (at the bank's discretion), the bank uses the money accumulated in the porting deposit to close the mortgage. The balance is returned to you. From that point on, you no longer make mortgage payments.
What are the considerations, advantages and disadvantages of mortgage porting
Mortgage porting has one advantage and many disadvantages. The one advantage is the ability to hold onto and keep using a mortgage built from attractive mortgage mixtures and interest rates that you got in the past and can't get now. Before you port, make sure you actually want to use this mortgage today:
Confirm that your mortgage really is attractive compared to the mortgages on offer today. You can get a sense of how interest rate levels then and now differ from the graphs of the Israeli government bond yields. But even that isn't enough — you need to check loan by loan.
How do you check this? Download the loan payoff statement for your current mortgage and compare each loan track against the rates available in the market today for the same track and term. You can see what rates are currently available in the mortgage market on our mortgage interest rates page, which is always kept up to date with the latest conditions. You need to work out how many parts of your mortgage are attractive and how many aren't. This exercise should, in theory, let you decide whether to port or not.
As we'll see in a few more paragraphs, even that isn't quite right. We'll show that under certain conditions, porting a mortgage into a new, larger one leaves you with an overall mortgage that is expensive and badly built.
Disadvantages of mortgage porting
One clarification: all the disadvantages below apply when you need to increase the mortgage beyond the ported amount. If the ported amount covers your financing needs for the next home, you can skip this section.
First disadvantage of mortgage porting: it is very difficult to negotiate with the bank on the terms of the new mortgage
When it comes time to negotiate the terms on the additional portion of the mortgage, you have no leverage over your bank. It knows that if you want to, you can go shop for offers at other banks — but those banks can't match the attractive interest rates from your previous mortgage. The bank knows it has you as a captive customer, and it will quote you a higher rate accordingly.
And if the terms and rates on the additional amount aren't to your liking? Then you'll have to give up the ported mortgage.
Second disadvantage of mortgage porting: the ported mortgage may impair the ability to repay the new and less favorable mortgage
From a regulatory standpoint, the additional debt beyond the ported mortgage is a completely new mortgage. For this debt you build a new mortgage mixture, unrelated to the previous one. The parameters that do tie the two together are:
- The total monthly payment, which is the sum of the monthly payments on the new mortgage and the ported mortgage. From that follows the payment-to-income ratio, calculated as the combined monthly payment of both mortgages relative to your monthly income.
- The LTV, calculated as the combined debt of both mortgages relative to the value of the new property.
Now you need to build a new financing program that comes with planning constraints — namely, the ported mortgage's numbers. Of these constraints, the troublesome one is the monthly payment: if, for example, the monthly payment you set for the total financing program is 5,000 NIS and the payment on the ported mortgage is 3,000 NIS, then you have only 2,000 NIS left to service the new debt you still need to take out.
And now we've arrived at the root of the problem.
Mortgage porting can force a low payment onto bad loans and a high payment onto good loans — when it should be the other way around!
If the financing terms available today aren't as good as they were before, you'll want to put a larger monthly payment toward the expensive loans you're taking out now. The more you increase the monthly payment on a loan, the shorter its term becomes, which raises the share of each payment that goes to principal, pays the debt down faster, and so costs you less interest.
But if a big chunk of your repayment capacity is tied up in the ported mortgage, you're forced to stretch out the term of the new mortgage — making those loans more expensive.
Example: how mortgage porting harms the overall mortgage
To make this concrete, let's work through a numerical example that we'll carry through this whole section. This is a true story! The mortgage we want to port totals 700,000 NIS, with a monthly payment of 6,747 NIS. It breaks down as follows (at the time of writing, the prime rate was 6%). The fixed unlinked (KALATZ) loan is very attractive, and you can't get the same rates when taking out the new mortgage:
We plan to draw an additional 900,000 NIS. Our total repayment budget is 11,000 NIS. That leaves us 4,253 NIS to service a debt of 900,000 NIS.
Suppose we take the whole amount as a fixed CPI-linked loan at 2.4% over a thirty-year term. Our total mortgage mixture — the ported mortgage plus the new mortgage — looks like this:
Look at the rightmost column — the cost of each loan. It's calculated assuming no change in the prime rate or inflation (which, of course, can't actually hold for a fixed CPI-linked loan). The total mortgage cost is 619,718 NIS.
What happens if we give up the ported loan and build a mortgage mixture — one we'd never actually recommend, with no real thought behind it — using the higher interest rates available at the time of porting? In other words, the same loan structure, the same amount in each loan, at even higher interest rates, with every loan set to a 16-year term?
The loan cost (ignoring inflation and prime-rate changes) is now 510,000 NIS — almost 119,000 NIS less! On top of that, we can expect meaningful savings on life insurance, because we pay off the mortgage sooner. Factor in the effects of CPI and inflation and the cost gap would be even wider.
Why does this happen? How can a mortgage made up of such good interest rates still end up more expensive? How can our advice in this example be to give up a good loan you can no longer get today?
The trap of mortgage porting: it fools you into thinking low interest rates make for a cheaper mortgage mixture
We've written about this: interest rates don't matter— the makeup of the mortgage mixture is the single most important factor in building a cheap financing program. Why? Because if you want to pay the bank as little interest as possible, you need to pay down the principal as fast as possible. The smaller the principal, the less interest you're charged on it.
We fell into the trap. We fixate on the ported loan and how attractive it is, and ignore what it costs to keep it. We sank a big share of the monthly repayment budget into the ported loan (the eight-year fixed unlinked loan), and that left us with very little to service the other loans. So we were forced to stretch the new portion of the mortgage — almost twice as large — over a very long term.
Remember this! The loan term drives the cost of a loan far more than the interest rate does.
📚Mathematical enrichment section (feel free to skip)
You minimize the interest and CPI-linkage payments to the bank by maximizing the negative derivative of how the principal evolves over time — not by minimizing the interest rates on the loan.
Key points and rules of thumb for successful mortgage porting
We don't recommend ruling out porting across the board. There are definitely situations where it's worthwhile, but you have to look at each case individually (we would be happy to advise you, contact us). Here are a few rules of thumb — though they're no substitute for a professional, in-depth analysis:
- The more you ease the payment constraint on the mortgage mixture, the cheaper the mixture you'll get. To do that, you need to figure out which portions are worth porting and which aren't. In the example above, the terms on the prime-linked loan were nothing special, so the right move would have been to close that portion rather than port it.
- The smaller the new mortgage is relative to the ported one, the more worthwhile porting becomes.
- Avoid porting loans with shorter terms than the loans in the new mortgage. The bigger the gap in years between the ported loans and the new loans, the less worthwhile porting them becomes.
- Work out the monthly payment you're allocating to the ported loans and make sure it fits with the new loans you've built.
Multiply the monthly payment of the loan by 100,000 and divide by the loan amount.
For the ported fixed unlinked (KALATZ) loan, multiply the monthly payment (₪5,366) by 100,000 and divide by ₪460,000. You get the monthly payment per 100,000 NIS of loan — this is the repayment unit.
We want the repayment unit of the new loan to be equal to or greater than that of the ported loan. The repayment unit of the 24-year fixed CPI-linked loan is 472 NIS per month per 100,000 NIS of debt.
Want to compare your old mortgage terms against new alternatives? Use our mortgage calculator to see which comes out ahead.
Good luck!