Say you want to purchase a property but the first mortgage amount is insufficient. Or perhaps your less-than-ideal credits disqualify you from getting bank mortgages. Maybe you need some urgent money to help you get through a tough time. In those and other situations, some borrowers may consider getting a second or subsequent mortgage behind their first mortgage. What are some basic concepts you should know about when getting those loans?

 

mtg-application

 

What Constitutes Default

What constitutes “Default” is one of the most serious terms of a Mortgage Commitment. Simply put, it’s what you are supposed to do as borrowers, and also what you are not supposed to do. Commonly, you are supposed to make monthly payments to the lender, pay property tax, and maintain home insurance. You are not supposed to tear down or damage your mortgaged property. In addition to the standard charge terms, what may constitute default is also specific to each lender and the Mortgage Commitment that they require you to sign. In the event that you have defaulted in making mortgage payments, the lender may make the principal amount of mortgage immediately due in accordance with s. 7(1)1.ix of the Land Registration Reform Act. Also, as stated in s. 24 of the Mortgages Act, lender may start Power of Sale procedures, which involves taking away and selling your property to repay the loan after you missed three months of payments (aka. defaulted in payments). Nevertheless, usually you can stop this acceleration clause and the power of sale procedures if you pay back all arrears and expenses before the lender starts any claims or before the lender completes this sale of the mortgaged property.

 

So what’s different when you loan from a second or subsequent lender? One possible difference is that when you default under your first lender and your second lender finds out about this, then the second lender may choose to remedy the default for you. This may happen when you miss monthly payments to your first lender, then your second lender will use their funds to keep your first lender up to date, while informing you that you have now defaulted under the second lender.

 

Why would the second lender do this? Commonly, it’s because they want to control the Power of Sale process in case you no longer have the ability to pay back the mortgage and they must sell off your property in satisfaction of the loan. The second lender wants to be the one who sells the property, usually because first lenders will incur a high fee during the sale, so that there’d be less money left for the second lender when the property is sold.

 

How would the second lender know that you have defaulted under the first mortgage? Usually, the second lender will require you to sign an Authorization that allows them to obtain mortgage statements and information from the first lender periodically. Often, if you want that additional mortgage, you’d have no choice but to sign this document. Now, when this happens, it’s usually not good news for the borrowers, because the second lender’s mortgage interest is usually higher than the first lender’s. Hence, when the borrowers are in shock of discovering that they have now defaulted under the second lender, most second lenders will simply shrug and say it’s within their rights to keep the first lender up to date, and in most cases they are correct.

 

Term

Usually second and subsequent mortgages have a term that is shorter than the first mortgage. When reviewing the Mortgage Commitment, it’s important to understand how long the term is, and whether there is an option to renew at the end of the term.

 

It’s important to understand the difference between amortization and term. Amortization is how the lender calculate the amount of your monthly payments. Term is the actual time the lender gives you to pay back your loan. Typically, the amortization period is much longer than the term. Simply put, amortization is comparable to minimum payments that the lender is allowing you to pay each month. This means at the end of the term, you will usually need a large lump sum payment in order to pay off the mortgage. Borrowers should be prepared to dish out this lump sum payment at the end of the term, or else the Borrowers may need to renew the mortgage (if possible) or seek other refinancing options. Otherwise, even if the Borrowers have been making monthly payments, not making this lump sum payment would likely result in the Borrowers being found in default.

 

When second or subsequent lenders offer a renewal option, it’s important to review whether there are conditions attached to the renewal. Some common renewal conditions include a higher interest rate or a shorter term.

Closing Documents

In many cases, borrowers who are getting a second or subsequent mortgage are in a hurry to get this money in order to use the mortgage funds to refinance their property, to put money into their business, etc. However, borrowers should understand that the solicitor for the second & subsequent lenders must protect their client and complete due diligence. While the due diligence required differ from case to case, there are three common things that most solicitors will request.

 

First, the lender’s solicitor may require the borrower to put the second or subsequent lender as an additional loss payee on their Home Insurance. They require this because in the event that the property is destroyed, they’d use the insurance proceeds as security. It is important to check with your Home Insurance to see if this can be done. In most cases, you can simply call the insurance company and instruct them to add the new loss payee. However, some home insurances will put a cap on how many loss payees they can accommodate. From experience, we know some insurance companies will stop at three lenders as loss payees.

 

Second, the lender’s solicitor may require a mortgage statement showing the outstanding balance and showing whether you have defaulted with the first lender. Typically, the lender’s solicitor will request the statement themselves with your permission. This process may take from a few days to one week or two.

 

Third, sometimes there are security interests registered on your property. This typically happens if you purchased a furnace, air conditioning system, or a large appliance that you are paying off on a periodic basis. In those cases, some lenders may ask the security interest holders to postpone their interest behind the lenders’ interests. Again, this process may take some time, depending on the specific security interest holders.

 

Conclusion

Since getting second and subsequent mortgages are generally riskier than first mortgages, you will be more protected if you consult a lawyer before signing the Mortgage Commitment. Of course, recruiting a knowledgeable lawyer through the relatively different closing process will significantly reduce your stress during the mortgage transaction.

Yi Dan (Sabrina) Ding 
Principal Lawyer 
Varity Law Pro. Corp. 
Tel: 416-477-5439 
Fax: 1888-620-4752 
Email: sabrina@varitylaw.ca
Address: 95 Mural St, Unit 600
Richmond Hill, ON, L4B 3G2
www.varitylaw.ca

Introduction

When you purchase a residential real estate property as a resale property (aka from another seller, not directly from the builder), what is a run-down of legal concerns that you should be aware?

house

 

S. 50 of the Planning Act

You should be informed whether the property is sold in accordance with S.50 of the Planning Act. If the transaction contravenes the Act, then it’s considered that you have not obtained an interest in land, although you have purchased it. It essentially voids the transaction, in accordance with s. 50 (21) of the Planning Act.

 

In the basic sense, S.50 of the Planning Act prohibits one from breaking up land into smaller pieces, and then selling only one piece, without first getting approval from the land development planning department or getting government consent (s.50(3)(f), Planning Act). If one want to sell one’s land and the real estate property on top of it, one must sell one’s entire lot or block of land as per the Registered Plan.

 

Nevertheless, discovering that the transaction contravenes the Act does not immediately makes the transaction void. All standard OREA agreement of purchase and sale contains a clause (para. 15) that allow the seller to fix this problem. If the seller is able to fix the problem, then the transaction may continue. Otherwise, the transaction fails and cannot continue.

 

A final caveat is that there are several exceptions to the prohibitions stated in S.50 of the Planning Act, and that is beyond the scope of this article. Please consult a legal professional for further information.

 

Matrimonial Home and Consenting Spouse

You should be informed whether the property being sold is a “matrimonial home” and whether the “consenting spouse” have agreed to selling this property. In accordance with Part II of the Family Law Act, the married spouse who is not on title to the property still have certain possessory rights regarding the property. Thus, the seller should obtain the consent from his/her non-titled spouse before selling the property.

 

If the spouse refuses to agree or if no spousal consent was obtained, then the property can still be sold. However, the property would still be subject to the non-titled spouse’s prior possessory rights. So it’s possible that the spouse may come back one day and demand to live in the property that the purchaser have already bought.

 

If the property is not a matrimonial home, then this must be stated by the seller on the Transfer, and stated again on any Charge/Mortgage registrations.

 

Realty Taxes

Outstanding taxes on property should be paid out by the seller. In accordance with s. 349(3) of the Municipal Act, 2001, realty taxes exist in priority to every debt and claim that is registered on property. This is true, even if the city made a mistake or did not register a tax arrears certificate. Thus, it is very important that realty taxes are up to date.

 

Prior Charges/Mortgages and Security Interests

You should be informed of any existing charges and security interests on the property. A charge is usually a mortgage, but can also be a loan that is secured against the property. A security interest is usually registered by a company that provides household appliance such as a furnace or a refrigerator. If the charges and security interests are not discharged after you bought the property, then you may need to carry those debts.

 

Of course, you can also voluntarily carry those debts. For instance, if you want to continue to rent the furnace, then you can just let that security interest to remain on title. Nevertheless, you should be informed whether there’s any outstanding payments for the security interest. All security interest holders should be brought up to date (aka have no outstanding payments) before the transfer of property.

 

As well, you may wish to keep the mortgage on title, if the property is transferred through a Will or as a gift.

 

Usually, the seller would use the purchase proceeds to pay out the existing charges and security interests. Thus, frequently the seller’s lawyer’s undertaking (promise) to discharge is used in place of an actual registered discharge. You should be diligent in following up with your lawyer after closing and ensure that all discharges are obtained.

 

Writ Search

You should be informed whether there is any executions against the seller. According to S. 9(1) of the Execution Act, the local Sheriff may take the seller’s land and sell the land in order to pay for the money that the seller owes to the execution creditor.

 

Therefore, it’s important for the seller to pay back the execution creditor and remove the writs against him/her. Again, most sellers would use the proceeds of the sell to pay back the creditors. Hence, it’s important that the seller’s solicitor undertake (promise) to pay the execution creditors and select the appropriate writ statements on the Transfer.

 

Easements and Restrictive Covenants

Easements are registered instruments that allow other parties to come onto the property. Common easements are ones registered by the city and the builder to perform routine repairs and maintenance on the property. Sometimes service providers, such as Rogers or Bell, register easements so they can come to your property and maintain their cable lines. Your lawyer should explain the easements to you, and remove any easements that have expired.

 

Restrictive covenants are registered instruments that tell property owners what they are not supposed to do with their property. For instance, sometimes owners are prohibited from building fences around their property. In other cases, owners are prohibited from undertaking renovations that would interfere with curbs and sidewalks, or affect the operations of sewers and hydro works. Again, your lawyer should explain the restrictive covenants to you, and remove any expired covenants.

 

Title Insurance

Phew, that’s all the legal concerns you need to worry about, right? Unfortunately, in some cases, no! The property you purchased could have violated municipal zoning by-laws. The neighbour’s fences could be encroaching onto your property. The seller could have been impersonated by a fraudster. What do you do – do you hire professionals in every field to prevent all those possible risks?

 

Not typically. Usually lawyers would recommend their clients to get Title Insurance, which would cover many concerns that were unknown to you and your lawyer at closing. I prefer to use Stewart Title, because they are known to have a relatively easier claim process, should you discover a defect covered under their policy.

 

Conclusion

This article described a list of legal concerns that typically exist in resale purchases. However, it’s important to note that each resale purchase is different, and there could be additional legal concerns dependent on the specific characteristics of the transaction. It is helpful to recruit a knowledgeable real estate lawyer to help you achieve a diligent and stress-free real estate closing.

 

This article is only meant to give general legal information. For legal advice on your specific mortgage situation, please consult a legal professional. 

Yi Dan (Sabrina) Ding 
Principal Lawyer 
Varity Law Pro. Corp. 
Tel: 416-477-5439 
Fax: 1888-620-4752 
Email: sabrina@varitylaw.ca
Address: 95 Mural St, Unit 600
Richmond Hill, ON, L4B 3G2
www.varitylaw.ca