Closings & Enforcement
Our office has attended to the closing of thousands of residential and commercial mortgage re-financings over the years. The fee to close a mortgage transaction will depend on what work is required to be done by our office, and whether the transaction involves private financing. If the transaction does involve private financing, additional work is required by the lawyer doing the work. However upon being provided full disclosure of the nature of the work required, we will be in a position to give you a fixed fee for the closing. If you would like to discuss your transaction, please do not hesitate to give us a call.
As a byproduct of involvement in both closing mortgage transactions, we have developed a strong level of mortgage enforcement expertise. Mortgage enforcement is complicated as a mortgagee (the holder of the mortgage) has multiple options when faced with a default by a mortgagor (the person who has borrowed the money and given a mortgage to secure repayment of the debt) including the right to foreclose on the property and take title in lieu of payment of the mortgage, and initiating power of sale proceedings which allows the mortgagee to sell the property to a third party to recoup the investment. In both cases a detailed and complicated procedure must be strictly adhered to.If you have a mortgage enforcement issue that you would like to discuss, please do not hesitate to call us. If you would like to see our fixed fee schedule for the various component parts of enforcing a mortgage by way of power of sale, please click here and we will provide you with this information.
Glossary of Mortgage Terms
This is the name given to the legal arrangement whereby someone borrows money on security of real estate. The mortgage is registered against title to the real estate. There are many other types of loan arrangements which do not involve real estate, such as lease and receivable financing, and “chattel mortgages”. This last term refers to a situation where a loan secured by personal property such as a car, boat or computer. To deal in mortgages secured against real estate in Ontario, you must be a licensed mortgage broker or agent.
This is real estate against which the mortgage is registered. You may also have situations where the lender will take “collateral security” in other property owned by the borrower. This is done where the lender does not believe that the primary security is worth enough to fully secure the loan being made.
This is what the borrower is called in the mortgage world. This is the person giving the mortgage security to the lender. The mortgagor is also sometimes referred to as the “chargor”.
This is what the lender is called in the mortgage world. This is the person receiving the security from the borrower by way of mortgage to be registered against title to real estate in return for lending them money. The mortgagee is also sometimes referred to as the “chargee”.
The amount owed to the lender by the borrower at any point in time.
This is the return the lender receives for loaning the money secured by the mortgage.
LTV or Loan to Value Ratio
The loan to value ratio is the principal amount of the mortgage relative to value of the property.
The critical concept in determining how much you can borrow and at what interest rate these funds will be loaned to you is the concept of the “qualified borrower”. If you are qualified borrower with respect to the amount you want to borrow, you can get the best rate available for the term you want. In summary, the following are the rules which are applied in determining the amount which you will qualify to borrow:
- Gross Debt Ratio – ‘GDS’ Ratio
An assessment is performed on the amount of your gross income per month relative to the carrying costs per month of the house against which the mortgage will be registered. The carrying costs include the mortgage payment itself (principal and interest), 1/12 of the annual realty taxes payable and the monthly heating cost. The general rule is that these expenses cannot exceed 32 percent of the client’s gross income on a monthly basis.
- Total Debt Ratio – ‘TDS’ Ratio
An assessment is also made of your total debt load per month relative to your gross monthly income. This involves adding to the expenses described in paragraph a. above the total other monthly debt payments you have other than the mortgage payment. The general rule is that these expenses cannot exceed 42 percent of your gross income on a monthly basis. Obviously the less debt you have, the more you will qualify to borrow.
- Credit Rating
An assessment is made of your “creditworthiness”. This involves looking at your credit history, the nature of your employment, and other similar factors to come up with an evaluation of how creditworthy you are. An important aspect of this process is evaluating your credit report, and specifically looking at a numeric rating of your credit generated by the credit reporting agencies such as Equifax which is call your “Beacon Score”. It is determined by a complex formula which incorporates such matters as your total debt relative to your available credit, the amount you pay each month relative to the minimum payment required, and any lateness in payment. It is an important lending criteria relied on by many of the major lenders. As a general rule, to be considered a prime triple A client, your Beacon score needs to be above 700. As it drops, the attractiveness of you to the lending institutions falls, and more expensive borrowing money will become.There are some strategies you can use to increase your credit score. If it is an income problem, you can add a family member to your application who has a good income with little debt. This will help the ration analysis. This is commonly referred as getting a co-signor. If the problem is a credit problem, you can drop the person with the credit problem from the application. However if their income was needed to qualify, you will have to replace them with someone else. You can also increase your credit score provided you have some time by reducing your debt, making more than the minimum payment required, and always making your payments on time.
Closed vs. Open Mortgages
A completely closed mortgage is a mortgage that cannot be paid off during the term of the mortgage, save and except for the monthly payment due under the mortgage. A completely open mortgage is a mortgage that can be paid off in full without penalty at any time during the term of the mortgage. In between these extremes are a wide variety of mortgages that are closed mortgages but allow for limited prepayment without penalty during the term of the mortgage. The nature and extent of these prepayment rights are important terms of the mortgage which you should consider in determining who to take out your mortgage with. Completely closed mortgages that do not permit the mortgage to be paid out under any circumstances are rare for residential mortgages. However the penalty to pay-out the mortgage early can be substantial, ranging from 3 months interest on the balance outstanding to an “interest rate differential” penalty that involves comparing the prevailing interest rate at the time of the prepayment and the interest rate under the mortgage. If the prevailing interest rate is lower than that provided by the mortgage, the penalty to discharge the mortgage early is equal to the lost interest revenue the mortgage company will incur by having to lend your money out a lower rate.
Term of the Mortgage
The term of the mortgage is the period of time during which the various contractual provisions which the lender and borrower have entered into are binding on each of the parties. The term can vary between 6 months to 25 years. Many people associate the term of the mortgage with the period of time when the interest rate is fixed. However this may or may not be true. A common and popular mortgage on the market today is a fixed term “variable rate mortgage”. In the variable rate mortgage, the interest rate will vary in accordance with changes in the prime rate, but the contractual rules governing how and when the rate will change, as well as all of the other terms of the mortgage, are fixed for the term of the mortgage. What is important to be cognizant of is that the term of the mortgage is the period of time during which the particular contractual provisions the parties have agreed are binding upon both the borrower and the mortgage company. At the end of any particular term, the borrower and lender must agree on a new term by renewing the mortgage, or the borrower must pay off the mortgage by refinancing with a different lender.
The amortization period of the mortgage is different than the “term of the mortgage”. Whereas the term of the mortgage is the period of time during which the various contractual provisions which comprise the mortgage contractual relationship as agreed to between the lender and borrower are binding on each party, the amortization period, or “am period” as it is sometimes referred to, is the time it would take to fully pay the mortgage if the interest rate and payment stayed constant. For first mortgages, the banks will generally offer a 25 year am period. However this is negotiable. You may be able to afford a more aggressive am period. The bottom line is that the lower the am period, the quicker you are paying down the mortgage, and the sooner you will be out of debt.
Accelerated Payment Options
Almost all mortgage companies give the borrower a choice to pay weekly, bi-weekly or monthly. Normally it is always better to choose the most frequent payment option as it will result in you paying more principal down each month even though the actual dollars paid out are the same. Simply by paying weekly you will reduce a 25 year amortization period to just over 16 years.
The amount of your own money which you have saved and which you intend to use to buy your home is referred to as your down payment. The minimum down payment required in Canada is 5.0% of the value of the house. You must be able to prove that this money has not been borrowed. A standard condition of most mortgage commitments is proof that you have not borrowed your down payment. This can be done by providing copies of bank account statements showing the accumulation of the down payment over time. However most mortgage companies will accept a “gift letter” to show that additional funds which have been received recently or will be received before closing have been gifted to you by a relative. In addition, you can use up to $20,000.00 of money “borrowed” from their own RRSP as part of their down payment. As a rule, the mortgage companies will not consider this borrowed money even though you have to “repay” your RRSP over time.
High-Ratio vs Conventional Mortgage
If the amount of the mortgage you need is no more than 80% of the value of the house, you are obtaining a ‘conventional mortgage’. If your down payment is less than 20% of the value of the house, they are obtaining a ‘high-ratio mortgage’. Subject to a few exceptions, if you require a high-ratio mortgage, you must purchase mortgage default insurance. You do not have to purchase this insurance if the mortgage is a conventional mortgage. The requirement to purchase this insurance if you need a high-ratio mortgage is not optional, and the cost of the insurance increases the less of the down payment is relative to the value of the house. However the amount of the insurance is added to the balance outstanding on the mortgage.
Portability of the Mortgage
The concept of portability in the world of mortgages refers to the right of the borrower to “port” their mortgage from their current home to a new home should they wish to move before the expiry of the term. The usual rule is that the mortgage becomes due and payable when you sell your property. In addition this will trigger the obligation to pay any prepayment penalty which is set out in the terms of the mortgage. However if you have a portability right, you can sell your existing property and transfer the mortgage to a new property without triggering the obligation to pay the prepayment penalty otherwise provided for in the mortgage.
Variable vs Fixed Interest Rate
A fixed interest rate mortgage means that for the term the client has agreed to, whether it is 6 months or 10 years, the interest rate will remain constant regardless of what happens to interest rates in the general economy. However in order to induce the mortgage company to lend money at a fixed rate, they will charge a premium over and above the rate they are charging on mortgages that bear interest at a rate that will vary with interest rates in the general economy. This type of mortgage is called a variable rate mortgage. In summary the following are the important characteristics and issues to consider with this kind of mortgage:
- As the name suggests, the interest rate varies during the term of the mortgage based on variations in some benchmark rate which is usually the “prime rate” of the financial institution which is offering the product. However it is important to note that the “prime rate” being used by the institution for this purpose may or may not be the prime rate as this term is used in common banking parlance and which you find quoted in the newspapers. As such you must always question how the benchmark against which the rate varies is determined.
- A variable rate mortgage is not an open mortgage. It will have a term, usually five years, and during the term the mortgage may or may not be able to be prepaid without penalty. You must always question what your prepayment privileges are.
- The interest rate you are paying may vary immediately on the variation of the base rate, or it may be fixed for small periods during the term, usually three months, and only vary at the end of these three month intervals if the base rate has not returned to its prior level. This type of mortgage is more accurately referred to as an “adjustable rate” mortgage. However the delay in changing the rate can have a huge impact in how much interest you actually pays over the term of the mortgage.
- Most variable rate mortgages, allow you to “lock-in” at the fixed rate for the balance of the term of mortgage at any time. However the conditions associated with this right vary between institutions. Again it is important to get informed on this issue at the time you take out the mortgage.
Additional Terms and “Industry Buzz Words”
Sometimes the owner of a property obtained their mortgage when rates were low. A purchaser can apply to the institution which holds the mortgage to “assume” the responsibility for the obligations of the mortgage, and to take advantage of the lower rate. The purchaser and the mortgage company would than enter into an Assumption Agreement. However whether or not the mortgage company will accept a new purchaser is at their option. As such the purchaser must “qualify” to borrow this amount.
Equal payments consisting of both a principal and an interest component, paid each month during the term of the mortgage. The principal portion increases each month, while the interest portion decreases, but the total monthly payment does not change.
Non-payment of the installments due under the terms of the mortgage (s). If you default under a mortgage, it triggers the right of the mortgage company to commence enforcement proceedings. These include the right to foreclose, the right to take possession of the real estate and the right to sell the property under power of sale. The basic difference between the foreclosure and power of sale is that if the mortgage company forecloses, they take title to the property in lieu of the debt i.e.: after foreclosure is complete the lender now owns the property and the debt is extinguished. In power of sale proceedings the lender sells the property on the market for what it can get for it and applies the net amount realized after paying all costs associated with the sale process to the mortgage debt. If the entire debt is not paid off, the mortgagor will continue to owe the mortgagee deficiency. If the lender is going to initiate power of sale proceedings, it must wait 15 days after default has occurred before it can serve Notice of Sale. The mortgagee than must give the mortgagor 35 more days to bring the mortgage back into good standing before it can take any further action in furtherance of the sale.
Is the term used to where a mortgage is paid in full and removed from title to the property.
Vendor Take-back Financing
When the purchaser can’t come up the needed down payment or a second mortgage from a third party, the seller can take back a the mortgage for the balance that the purchaser needs. The terms of this mortgage will be negotiated at the time that the Agreement of Purchase & Sale is signed and will be included in the Agreement. Most of these arrangements are not renewable nor transferable.
Mortgage Life Insurance
A form of reducing term life which you can buy from various sources. If you die before the mortgage is paid in full, the insurance company will pay off the mortgage. The intent is to protect survivors from losing their home.