Realty Realities

By Graydon Ebert, Associate

Recently I was meeting with a client to sign the documents for his purchase and mortgage of a new property. When going through his mortgage, he was puzzled as to why the mortgage was going to be registered for a higher amount that he was actually receiving. Understandably he was also confused why the bank was registering the interest rate on his mortgage at an exorbitant rate instead of the more modest rate that he negotiated with the bank. He was especially surprised when I told him that this practice was relatively common.

Are the banks trying to pull a fast one on unsuspecting home owners? While the banks often, and sometimes deservedly, get a bad rap for hidden fees, charges, etc., in this instance they are actually saving you money and time. How could that be?

More and more often, lenders are using mortgages in more creative ways. For example, they are using them to secure home equity lines of credit that are used not only to finance the acquisition of a property but also a line of credit secured by the equity in property. For example, a property may be worth $300,000. The owner may receive $250,000 in funds to close the deal and a line of credit for an additional $50,000. In this case, we will receive instructions from the lenders to register the mortgage for $300,000, even though the owner is only receiving $250,000 in funds and may never use the line of credit at all. Why? The lender wants the flexibility to enforce the mortgage to the maximum amount they will receive if the credit is extended to its fullest. The alternative is that the lender will register for the amount of funds received by the owner, and each time the owner receives advances from the line of credit, the lender will require that a new mortgage be registered for the new amount of credit outstanding. This is burdensome and costly, as the lender will require you to pay for the cost of the new mortgage and you will have to spend time at your lawyer’s office and the bank signing a new package of documents.

The same reason why lenders will often register at a higher amount than the funds received applies to why they will often register at a higher interest rate than what the parties have agreed upon. Especially where the mortgage secures a home equity line of credit with a variable rate, the lender will register at a significantly higher rate (often prime plus 10%) to give them the flexibility should interest rates rise, so a new mortgage won’t have to be registered if rates go up, saving the home owner the time and expense.

It is important to remember that just because the mortgage is registered for an amount higher than what the lender is advancing you and for a rate higher than they are charging, your actual repayment terms and the applicable interest rate is what is in your mortgage agreement. The lender cannot come after you for more than that. So while it looks like your bank may be trying to catch you off guard, in fact they are saving you a bit of time and money down the road. Now I bet you’re really surprised!

by Graydon Ebert, Associate

The Government of Canada has recently introduced new rules for all mortgages insured by the Canadian Mortgage Housing Corporation (“CMHC”). The law requires that mortgage insurance must be obtained from CMHC where the homebuyer has made a down payment of less than 20%. The government made 4 important changes to the rules.

1)  The maximum amortization period has been reduced from 30 years to 25. The effect of this change is that monthly mortgage payments will be slightly higher as they will be amortized over less years, but the interest paid over the mortgage will be significantly reduced.

2)   The maximum loan amount that a borrower can get when refinancing has been reduced from 85% of the value of the home to 80%.

3)  The government has introduced limits on the gross debt and total debt ratios that lenders use to assess a borrower’s ability to pay when approving the borrower for a mortgage.

4)  Mortgage insurance is only available for homes with a purchase price of less than $1 million. For homes over $1 million, the borrower must make a down payment of at least 20%.

Now perhaps you are in the market, looking for a new home. Maybe you have already been pre-approved for a mortgage. Maybe you have signed an agreement of purchase and sale and have made a mortgage insurance application. Maybe you have bought a condo but it hasn’t been built yet. Maybe you are looking to refinance or renew your mortgage. If you are in any of these situations, you probably want to know if these new rules will apply to you.

The first thing to remember is that if you make a down payment of 20% or more, these rules do not apply to your mortgage.

The new rules take effect July 9, 2012. They will not apply where a mortgage application has been made before July 9,2012 to satisfy a binding agreement of purchase and sale, financing or refinancing agreement. If your agreement of purchase and sale is dated earlier than July 9, 2012 and a mortgage insurance application  has been made before that date, the new rules will not apply, even if there are outstanding conditions in your agreement that have not yet been fulfilled.

Any new mortgage insurance application received between June 21, 2012 and July 9, 2012 that does not conform to the new rules must be funded by December 31, 2012. This is relevant to those who are considering purchasing a condo in the near future that has not been built. If the purchaser has bought a condo that hasn’t been built and made a mortgage insurance application between June 21, 2012 and July 9, 2012, the new rules will apply if the mortgage is not funded by December 31, 2012. So you have to be careful. If you are thinking about purchasing a condo in the next couple weeks that you won’t be paying for until it is built, the new rules will apply unless you receive the mortgage funds before December 31, 2012. You need to make sure you know when the condo construction will be completed to know whether the new rules will apply.

If you have been pre-approved for a mortgage, but will not sign an agreement of purchase and sale and make a mortgage application before July 9, the new rules will apply to your mortgage.

If you are planning on renewing your mortgage or switching your mortgage to a different lender, you won’t be affected by these changes as long as no new funds are added to the mortgage.

If you are planning on being active in the real estate market or refinancing your mortgage in the next couple of weeks, or have already begun the process, make sure you know if the new rules apply to your situation, and if so how the new rules will affect your plans going forward.