If you are buying a property in the greater Toronto area, like most people, you will need a mortgage to assist you with the purchase. This column will examine some important points about mortgages and some of the pitfalls to avoid when buying or selling a property with a mortgage involved in the transaction.
- Due to the recent government intervention and new rules, it is becoming increasingly difficult for ordinary people to qualify for a mortgage. It is therefore important for Buyers to obtain a mortgage commitment or preapproval from a financial institution prior to signing an Agreement of Purchase and Sale. In addition, it is prudent to make any offer to purchase conditional on obtaining satisfactory financing.
- If you are arranging a mortgage, it is very important to have an experienced mortgage agent or broker on your team. Your mortgage professional will assist you in navigating the complex world of mortgages and will advise you on the best mortgage to suit your needs. Oftentimes, real estate agents or friends and family can provide you with a referral for a good mortgage broker.
- If you have purchased a property, it is critical to start the process of obtaining the mortgage as soon as possible. Depending on your financial situation, it can take quite some time to finalize the mortgage. If you delay too long, your real estate lawyer may not be able to prepare your file for closing and more importantly, obtain the necessary funds from your lender in order to close your transaction. Failing to act quickly is a common mistake amongst Buyers which often results in unnecessary stress and additional costs in the event that the closing is delayed.
- A recent trend that I have seen is a first time Buyer, who purchases a property and discovers that they cannot qualify for the mortgage loan. This will often necessitate one or both of the Buyer’s parents having to co-sign for the mortgage loan. In cases like these, the parents will need to go on title to the property along with the Buyer. This raises many issues which must be addressed such as how the property is to be owned, capital gains issues for the parents and the best way to maximize the land transfer tax rebate if the Buyer is a first time home Buyer. Again, all of these issues need to be resolved well before closing to avoid delays and unnecessary costs.
- I am often consulted by clients who wish to transfer title or ownership to a property for various reasons. Many property owners are not aware that if there is a mortgage on the property, they may not be able to transfer ownership of the property without the approval of their lender. Doing so without the approval of their lender could be considered a breach of the mortgage resulting in the lender demanding full repayment of the outstanding balance of the loan. For this reason, we always caution clients about obtaining the consent of the lender prior to any transfer of title or ownership.
- Due to the increased difficulty in obtaining mortgages, many Buyers will have no alternative but to seek financing through private lenders. In cases where a traditional bank or trust company will not provide a mortgage, a private lender may be willing to finance the mortgage. If you are arranging a private mortgage, please keep in mind that private mortgages generally result in higher interest rates and additional broker, lender and solicitor fees.
- Many homeowners do not understand the difference between a line of credit and mortgage. If you are purchasing a property and are arranging a line of credit, the line of credit will typically be registered on title to the property. In such cases, this secured line of credit is similar to a mortgage as it is a lien on the title to the property.
- First time home Buyers are naturally concerned with the amount of each monthly mortgage payment. However, many fail to realize that the length or term of the mortgage can be greatly reduced by making accelerated mortgage payments or by taking advantage of prepayment privileges which many mortgages offer. Again, it is important to consult with an experienced mortgage broker who can advise on the various options.
- When selling a property, many Sellers fail to realize that they are breaking their mortgage prior to the maturity date. Accordingly, if the mortgage is a closed mortgage, the lender will typically charge what is called a prepayment penalty. The amount of the prepayment fee will depend on the outstanding amount of the mortgage, the term remaining on the mortgage and the current interest rate. Oftentimes, the penalty can be quite large which may come as an unexpected surprise to the Seller. However, in some cases, the penalty can be reduced if the Seller is purchasing another property and staying with the same lender.
- As you can see, there are many important factors to consider when buying or selling a home with a mortgage. Obtaining professional advice is strongly advisable.