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Few people are able to pay the full price of their home immediately. Commonly, after paying the down payment, the rest of the purchase price is financed by a mortgage. If they qualify, buyers may arrange for a new mortgage or assume an existing mortgage on the property.

Mortgages
What is a mortgage?
A mortgage is a loan of money usually from a lending institution such as a mortgage company, trust company, bank, or credit union.

When reading a mortgage document, the person borrowing the money is the mortgagor (borrower), and the lending institution is the mortgagee (lender).
To make sure that the lending institution will get back the money it lends, it registers the mortgage on the title of the property. This does not mean that the bank owns the house. A first mortgage, when registered, serves as notice to all persons who deal with the property that the lender has a claim against the property because money is owing under the mortgage. The property acts as a kind of collateral, ensuring that the lender will get back the money loaned.

There are many mortgage options available. You can get fixed or floating interest rates, an open mortgage, or one that is closed. You can even get a line of credit secured by a mortgage. It is wise to consider how each option would work for your income and circumstances.

Mortgages usually have both a term and an amortization period. The term of a mortgage is the length of time a mortgage runs before it is due and must be renewed. Interest rates vary depending on the term the borrower chooses. An amortization period is the total length of time it would take to pay back all the money borrowed, and in most cases it will be a longer time than the term. The interest rate and the amortization period together determine the monthly payments that will be made on the amount borrowed.

The term of a mortgage can be open or closed. An open mortgage allows you to make additional mortgage payments or to pay out the balance of the mortgage without penalty. In a closed mortgage, only the payments specified in the mortgage agreement can be made. A closed mortgage may be modified to permit early payout or additional payments with an interest penalty.

For example: Robin needs a $50,000 mortgage to purchase a house. There is a choice of amortization periods ranging from one to twenty-five years. Robin chooses to amortize the mortgage over fifteen years. Interest rates have been dropping so Robin negotiates an initial term of one year. Robin knows that each time the term of the mortgage is renegotiated there will be the option of choosing an open or closed or modified-closed mortgage. Robin does not expect to be able to make any additional payments during this one year term, so decides to take a closed mortgage.

Types of mortgages
There are two types of mortgages: conventional and high ratio. A borrower who makes a minimum down payment of 25% of the lesser of the appraised market value or the purchase price can obtain a conventional mortgage. No mortgage insurance fee is charged to get this type of mortgage. Borrowers may be asked to pay to have the lender conduct an appraisal of the property.

When a borrower makes a 5 - 25% down payment, the lender grants a high ratio mortgage. Some lenders refer to these as high risk mortgages. The minimum down payment is 5%. This cannot be borrowed money. High ratio mortgages are insured by the Canada Mortgage and Housing Corporation (CMHC) or GE Capital Mortgage Insurance Canada, so that the lender will be paid if the borrower stops paying. A mortgage insurance fee of up to 3% of the mortgage amount is charged to the borrower. This fee is usually added to the mortgage and repaid over the amortization period. Sometimes lenders charge a non-refundable fee to process an application for a mortgage. Before approving the mortgage, the lender arranges to have an appraisal of the property done. The borrower has to pay the appraisal fee, even if the mortgage is not approved.

Assuming an existing mortgage
It is sometimes possible for buyers to assume an existing mortgage, depending on the seller's mortgage contract with the lender. When a mortgage is assumed, the buyer agrees to take over the seller's obligation to repay the lender. Often a buyer assumes an existing mortgage because its terms, for example, the interest rate, are better than those the buyer could negotiate for a new mortgage.

Second mortgages
A second or third mortgage is basically the same as a first mortgage. The amount of money available to the borrower for a second mortgage depends on the amount of equity in the property. The equity is the difference between the value of the property and the amount still owing on the first mortgage. Lenders charge a higher rate of interest on second and third mortgages. Second mortgages are often obtained to finance major renovations to the property or to raise money for a down payment on another piece of property. A second mortgage gives the lender a claim to any money left over from a sale after the prior mortgage has been paid.

When to look for financing
It is a good idea to start looking for financing before making an offer. Lending institutions will sit down with borrowers and determine the maximum amount of money that can be borrowed and discuss payment schedules. They may commit to a certain size of mortgage at a set interest rate. This is called a pre-approved mortgage. This assists buyers in determining their price range. It is important to remember that not more than 30% of before-taxes income should be spent each year to finance the purchase. It is a good idea for buyers to shop around for a mortgage that best suits their needs. Interest rates and other provisions in mortgages can vary from lender to lender.

Many people use mortgage brokers to make arrangements for financing their house purchase. Mortgage brokers are businesses separate from a bank, who will receive applications for mortgage financing from clients, and then find a bank or other institution that is willing to loan the money on terms that are acceptable to the borrower. Much like an insurance agent, a mortgage broker may have a number of lenders that he or she can refer a client to. The idea is that the broker should look at things like the lending requirements and interest rates charged by various lenders, to try to find the best deal for the client. The broker will process the application and forward it to a chosen lender for review. It if is approved, the broker will notify the client, and the bank then forwards instructions to a lawyer to register a mortgage in its favour.

"Subject to Financing" clauses
Because most buyers borrow money to pay for property, most offers to purchase and agreements for sale contain a “subject to financing” clause. This clause makes the offer to purchase dependent on getting suitable financing by the completion date. A “subject to financing” clause obliges the buyer to make reasonable efforts to seek financing for the amount and on the terms stipulated in the offer. A buyer cannot get out of the contract by refusing to obtain financing.

Rights and Responsibilities of Lenders and Borrowers under Mortgages

Default under a mortgage
The lender has a right to get back all money lent, together with interest. As discussed earlier, this is why a mortgage is registered against the title to the property. The registered interest in the property gives the lender certain rights if the borrower defaults. A borrower defaults on the mortgage if he or she breaks certain terms in the loan agreement. Examples are when payments are not made or are late, the property is uninsured, or the taxes are not paid.

Redeeming the mortgage
After defaulting, borrowers can have the opportunity to pay the lender all arrears of principal, interest, and taxes plus any costs to the lender as a result of late or missed payments. This must be done before there is a final order for foreclosure. If the borrowers take advantage of this opportunity, it stops any foreclosure proceedings and puts the borrower in the same position as if no default had occurred. This is called redeeming the mortgage, or redemption.

Foreclosure
If a borrower defaults on the mortgage, the lender has a right to foreclose. Foreclosure is an action taken by a lender to collect all the money owed on the mortgage or alternatively, to obtain title to the mortgaged property.

It may seem strange that the lender can get all the money owing simply because the borrower missed one payment. The reason is all mortgage documents contain an acceleration clause. This clause means that if the borrower defaults, the full amount owing to the lender is accelerated, that is, it all becomes due immediately.

Foreclosure must be done through the courts. It can take months to complete. A foreclosure is completed when the court issues a final order for foreclosure. A final order for foreclosure allows the lender to become the registered owner of the property. The lender can then sell the property and keep the proceeds.

Special rules apply to a foreclosure of farm land. Persons facing this type of foreclosure should seek legal advice. For more information on this area of the law see the PLEA publication, Farm Financial Difficulties.

Judicial sale
When a lender sells a home after foreclosure, it can keep any proceeds from a foreclosure sale that exceed what is required to pay off the debt and cover costs. This surplus represents the borrower's equity in the property. Borrowers who do not wish to lose the equity in their property may object to the foreclosure and request the court to grant an order for judicial sale.

An objection and request for judicial sale must be made before a final order for foreclosure has been granted. A judicial sale is a court-ordered sale of the property. These sales are sometimes called sheriff’s sales because they are often conducted by the sheriff. The proceeds from a judicial sale will be applied to pay off the debt, property taxes, legal costs, and the costs of the sale. Any money left over is paid to the borrower.

Discharging the mortgage
When the mortgage has been paid in full, the borrower has the right to have the mortgage discharged. Discharge of the mortgage means that the registration of the mortgage is removed from the Certificate of Title. The lender has no further claim against the property. When the mortgage has been fully paid off, the homeowner may want to consult a lawyer to make sure that all matters about the discharge of the mortgage are completed.

Vendor Financing
Sometimes it is possible to buy property and have the seller (or vendor) finance the purchase. To do this, the parties will usually have their lawyer draw up an agreement for sale in which the seller keeps title to the property until the buyer has paid the seller the full purchase price. The agreement outlines terms such as the purchase price, who has possession of the property, any down payment, the interest to be charged, how much the payments will be and when the payments are to be made. Once signed, the buyer registers the agreement on the title to the property by way of caveat.

A vendor financing arrangement requires careful drafting of the agreement for sale and other documents to ensure that the legal interests of both parties are adequately protected.

If the buyer breaches any term of the agreement for sale, for example, by failing to make a payment, the seller can cancel the agreement for sale. The cancellation of an agreement must be done through the courts. The court can refuse to order cancellation where it appears likely that the buyer will be able to pay the full purchase price. If the court orders cancellation of the agreement, the buyer could lose the money already paid to the seller. Once an agreement is cancelled, the buyer has no claim to the property.

Public Legal Education Association of Saskatchewan Inc.
The Public Legal Education Association of Saskatchewan (PLEA) was incorporated in 1980 as a non-profit, non-government organization which exists to educate, inform and empower through law-related education.