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!