Mortgage Fundamentals
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A mortgage is a security that is held against a
property by the lender (mortgagee) who
lends money to the borrower (mortgagor)
◦ Mortgages are normally registered in the Land
Registry Office
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Equity of Redemption is a right of the
mortgagor to reclaim the mortgaged property
once the mortgage has been paid
1. Legal mortgage
Direct conveyance of the title deed is involved
Mortgagee holds title to the property until the
mortgagor pays him back
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2. Equitable mortgage (mortgage on equity)
Known as junior mortgage
Mortgage taken against home equity line of credit
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i.e. against the equity in your property
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Does not involve conveyance of title
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Backed up against additional security, i.e. moveable
items like boats, cars or trailers or personal
possessions that can be removed without affecting
property (appliances, televisions, stereo, etc.)
3. Chattel mortgage
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There is an implied covenant made to lender
to borrow money
◦ For instance, the borrower must pay property tax,
keep property insured and maintain it
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If the covenant is breached, the lender may
take legal action against the borrower and
institute foreclosure (power of sale)
Power of sale (most frequent remedy)
1.
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Legal right of the mortgagee to force sale of a
mortgaged property without judicial proceedings
Power of sale is fair because it only entitles
mortgagee to get outstanding mortgage amount,
and the mortgagor can keep any excess amounts
from the sale after the mortgagee has been paid
Bank waits 15 days after default in which it will try
to negotiate with mortgagor by phone. They will
also send through registered mail form 1 – which
is Notice of Sale under Mortgage under the
Mortgages Act
The lender will wait for response of borrower
◦ If there is a power of sale clause in the mortgage
agreement, the bank will wait 35 days, or else they will
wait 45 days as per the statutory requirement
◦ During this period, the bank is not authorized to take
any action but failure to pay at the end of this period
enables bank to pursue foreclosure
◦ The property is then put on sale on the market
 The property are normally sold in the condition they are in
 If the mortgagor is able to pay the sum, offers on the
property may be declared invalid by court
◦ Once property is sold, lender will take outstanding
amount and all remaining equity will transfer to
borrower
 If the amount is insufficient, lender may sue borrower under
personal covenants
2.
Foreclosure
◦ Foreclosure action can be taken immediately after
default
◦ Mortgagor can redeem their equity within 20 days
after filing an application in court
◦ The mortgagor is allowed 60 days to sell the
foreclosed property and pay the mortgagee the full
amount owed
◦ If the borrower fails to sell, the lender may sell the
land and keep all equity recovered
 However, the option to sue is not available
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Pre-approval mortgage adds negotiating
strength
◦ Buyers can argue that they have pre-approval from a
bank, which will prompt seller to work with them as
opposed to other buyers
◦ Pre-approval shows that buyers are qualified to
close the deal (bank will lend money)
◦ Such a buyer is like a “cash buyer”
◦ Buyer just needs to meet preconditions such as
NOA, Credit check, T1 General
◦ All banks have their own preapproval forms, but
most consist of maximum amount they can borrow
and the interest rate they will get
◦ Banks confirm pre-approval after appraisal of
property
◦ It is important the salespersons read pre-approval
documents carefully because:
 Pre-approval is not a firm contract and the preapproving bank may reject approval even after all the
conditions are met
 Therefore, if you do not make any offer conditional on
the mortgage and the mortgage ends up getting
rejected, you can get sued by the buyer who can argue
that you should have had a mortgage condition in the
Agreement
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A mortgage commitment is not a guarantee
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A pre-qualification is a guarantee
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The bank does not have to lend the money if
all the conditions are met
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Banks have varying criteria for:
◦ Different types of properties
◦ Different conditions of properties
◦ If there are other mortgages on a property
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A higher interest rate will be charged if the
risk of lending for lender is high
◦ For instance, damaged properties will require
repairs before they can be sold so a bank may
charge higher interest rates on mortgage loans
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Bad conditions result in high interest rates:
◦ Physical detractions:
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Select types of siding
Outdated wiring systems
Lack of furnace
Well on property
Low water gallonage per minute
Partial basement//dirt floor
Deteriorating neighborhood
Exterior/interior design weaknesses
◦ Legislative issues:
 Non-compliance with local building codes
 Failure to comply with zoning by-laws
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Open mortgage can be paid off without
penalties
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Closed mortgage cannot be paid off until the
term expires
◦ Penalty applies if there is early payment
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Fixed interest mortgage has fixed interest
throughout duration of mortgage
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Variable interest mortgage has interest rates
that depend on market conditions
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Conventional mortgage is a mortgage on a
property where more than 20% of the purchase
price was put down
◦ Under a conventional mortgage, no insurance is needed
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High-Ratio Mortgage is a mortgage on a property
where less than 20% of the purchase price was
put down
◦ High ratio means high risk
◦ This means mortgage default insurance is required
◦ Must be insured through Genworth (GE), AG or CMHC
(Canadian Mortgage Housing Corporation)
 There is a 1-2% fee depending on the loan amount
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The insurance company pays the lender
immediately upon default
◦ This makes sure that the lender does not lose any
money
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Default insurance typically protects the lender
and not the borrower
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Wraparound mortgages are created when two
mortgages combine into a single one
For instance, you have a first mortgage provided
by RBC worth $150,000 at a 3% interest rate and
a second mortgage provided by a private lender
worth $50,000 at 17% interest
Instead of paying 17% interest on the second
mortgage, you combine both mortgages (or wrap
around) so that you pay $200,000 at 4% interest.
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A blanket mortgage is said to exist when it
covers more than one property
For instance, if you own one house in
Markham and a cottage in Muskoka. If both
properties are under one mortgage with one
payment, it is a blanket mortgage
Meanwhile, if 2 mortgages are made into one
mortgage, it is a wraparound mortgage
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Bridge loan is a short-term loan for residential
purposes
When you sell a property and subsequently
purchase another one which has an earlier
closing date than the closing for the property you
are going to sell, you can acquire a bridge loan to
pay for the property you want to purchase
If you buy before you sell your property, you use
a bridge loan to fill the gap between buying and
selling your property
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Gap loans are short-term loans for
commercial purposes
It acts like interim financing to provide funds
between construction advances and obtaining
permanent financing
It is sought by developers in the “gap period”
when they wish to start construction but are
waiting for permanent funds to come through
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Which kind of mortgage payment is most
commonly used?
◦ Blended payment where the interest and principle
are paid together in a single payment
◦ Mortgage payments are blended because interest
and principle are not paid side-by-side
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What is the main source of down payment on
a property?
◦ The saver’s money that is in our RRSP or GIC
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What is a mortgage commitment?
◦ Offer to lend without any guarantee
◦ Conditional offer that depends on you providing
lender with Notice of Assessment, T4 Pay Stub etc.