Quick Tips From Real Estate Lawyers

Date: November 24th, 2020
By: Ron Thibeault

Providing our viewers with Quick Tips from Real Estate Lawyers here in Calgary. We never want you to be left confused so follow these insider suggestions to help you get by with less stress.


January is a great time of year, daylight is getting longer, spring is around the corner and the local municipalities will set you up on monthly taxes without issue.

Most Municipal Districts and cities have a monthly tax payment option called TIPP (Tax Installment Payment Plan). Property taxes run from January to December each year. You can pay yearly, usually mid-way through the year, in full or through these monthly direct debits from your account.

It is usually simple to set up as a phone call to the City (Calgary is 403 234 7480) and they will email you an application form which you fill out and send back in.

TIPPS – it is simple to do and simple to help with your budgeting!

QUICKTIP #2 – Subtraction Through Addition!

Saving money on your house and car insurance can be done in a variety of ways. One of the easiest ways is to ensure that you are getting what is called “multiple rider discounts”.

Some of our clients use 2 or more insurance companies for their insurance coverages. Sometimes this happens because two people in a relationship have loyalty to their existing insurance provider.

By combining insurance coverage for your house(s) and vehicles with 1 provider you can obtain savings for each insurance policy you bring in addition to your current coverage. Make sure to ask for these discounts and to shop around as these discounts will vary by company.

QUICKTIP #3 – Get in Lock-Down Mode

Just bought a home? An important question to ask is, who do you know that has keys to your new home? More importantly, who may have keys that you don’t know?

We always advise home buyers to have the doors to the home rekeyed after they take possession. Make sure to do it sooner, rather than later. The Seller may seem like a friendly sort but there may be people they know who have been given keys but haven’t given them back yet. Who knows maybe the Seller isn’t as “friendly” as you think!

By rekeying the locks in your new home, you can rest assured that you are now fully in control of the home and that you have helped reduce a major risk for yourself.

For more information regarding real estate law, we are Calgary’s leading legal real estate team to help you. Contact us today, 403 245 – 3500, or email us at [email protected].

Why You Need an Enduring Power of Attorney?

Date: November 24th, 2020
By: Bill Leclair

Things To Consider While Estate Planning

What Is An Enduring Power Of Attorney (EPA)

One of the documents we include as part of our Estate Planning package is an Enduring Power of Attorney. The EPA (as it is known) is a relatively inexpensive legal document yet very effective. The donor is the person who gives the EPA to the person appointed (referred to as the “Attorney”) which lasts until the Donor dies.

The Disadvantages Of Not Having EPA

Why is an EPA considered an extremely useful part of an Estate Planning package? The Attorney has the authority to deal with real property the donor owns, deal with necessary expenditures required on behalf of donor, deal with the CRA and appoint lawyers, accountants or other persons for such compensation and length of time as the Attorney considers advisable. The most common examples of the use of an EPA is the sale of the donor’s house or dealing with monetary assets of the donor.

The Importance Of An EPA

Why is an EPA considered an extremely useful part of an Estate Planning package? The Attorney has authority to deal with the property the donor owns. This means they deal directly with the necessary expenditures required on behalf of the donor. They work with the CRA and appoint lawyers, accountants or other persons the Attorney considers advisable for the necessary compensation and length of time. The most common examples that EPA’s are used for are;

  • The sale of the donor’s house;
  • Dealing with the monetary assets of the donor.

When Drafting An EPA, There Are 2 Options:

First, it can take immediate effect without a trigger or make it conditional on incapacity.

In the second case, the EPA only becomes effective if the donor is mentally incapable or mentally infirm of making reasonable judgements in respect of matters relating to all or part of the estate. We need a written declaration of the Attorney and medical physician practicing in Alberta that the donor lacks mental capacity. It is conclusive proof to ensure the EPA becomes effective.

The other way is if the donor having mental capacity declares in writing that the EPA is effective.

The Difference In Cost & Time

The reason for getting an EPA is the difference in cost compared to having to get a Court Order plus the length of time required to get said Order which can take six weeks or longer depending on the circumstances. That time frame may present problems when there is a desire to sell a house or have monetary assets attended to on a more urgent basis.

In the end, the Enduring Power of Attorney (EPA) is a vital document that should certainly be considered as part of any Estate Planning you undertake. If you would like more information or are interested in an estate plan don’t hesitate to contact us, call us at 403 245-3500.

Avoiding Mortgage Payout Penalties

Date: November 24th, 2020
By: Ron Thibeault

How Mortgage Payment Penalties Work

What we find most surprising when dealing with Sellers is that they rarely know how a mortgage prepayment penalty works. Either it was never explained to them. By either the mortgage broker, their bank, or their lawyer. Or, they never took the time to understand this important factor of mortgage payout penalties, when they first mortgaged their property.

In today’s interest rate environment, our clients are seeing some very severe penalties. This is due to a little-known clause on prepayments. The mortgage penalty is  applied on the basis of the greater, of the payment of 3 months of mortgage interest. Or applied as the interest rate differential – the IRD.

Closed Mortgage

When you elect to have a closed mortgage there are limited prepayment privileges. Which range anywhere from 5% to 25% of the principal of the mortgage on an annual basis. Typically there is also the option to increase your mortgage payment by a maximum amount each year. If you go above these limits you will likely incur a mortgage penalty. We typically see mortgage penalties being incurred either from a sale or a refinancing of the property.

Interest Differential

Understanding 3 month interest is simple enough to do. However, the interest differential is a little more difficult and of greater concern. Essentially, this is the difference in the amount of interest you would be paying for between the balance of the term of your mortgage and the amount of interest you would be paying if the interest rate were equal to the bank’s current posted rate for the balance of that term.

Seems innocent enough, except for the fact that we have seen interest differential penalties in the tens of thousands of dollars. This can and will potentially affect your return on your property. In some cases has resulted in Sellers having to pay money in order to sell their properties.

What Can Be Done About Mortgage Penalties?

What can you do about mortgage penalties? First, understand what the mortgage penalties are for the mortgage product you are contemplating. Second, understand what your purpose of buying a property is. Are you intending to sell the property relatively soon or hold on to it for longer? Match your term and mortgage product to your intentions. Third, engage your banker or mortgage broker in a full and frank discussion of what your needs are and how prepayment costs can be minimized.

Maybe the best advice of all is to understand what your penalty might be BEFORE you decide to sell or refinance your home.

We can help you understand your mortgage payout penalties and whether or not you will have to pay a penalty. Don’t hesitate to get in touch before you sell or refinance your home. For any questions or concerns contact us today by emailing us at [email protected].

The Risk & Rewards Of Buying A Foreclosure

Date: November 23rd, 2020
By: Ron Thibeault

Understanding The Ins & Outs Of Foreclosure/Judicial Sales

Often when we get calls from clients wanting information on buying a foreclosure, the background information they have is out of the US. In Canada, each province has its own set of rules and procedures and understanding how the process works in Alberta will help you decide whether the risk is worth the reward.

What Is The Difference Between A Foreclosure And A Judicial Sale?

There aren’t big differences in the end result of these two processes, but a Judicial Sale is a bit of a strange duck to be perfectly honest. In the case of a foreclosure, you are buying the property from the lender who has obtained title. In a Judicial Sale, technically, the original owner still has title but now the Court has imposed a sale process to secure a final sale that can compensate the lender whose mortgage is in arrears. The key point in a Judicial Sale is that right up to the last hour, the Owner has the right to do what is called “redeem” the mortgage – to bring in all the arrears and costs, etc. and if they do that the whole foreclosure process is halted. Any offers are put aside, and we are back at square #1.

The Risks Of Foreclosure Properties

When clients consider purchasing a foreclosure property they receive a draft offer from the Listing Realtor that looks very different. There are large parts of the standard contract crossed out because either the Court or the lender will not give the standard warranties that a Seller has to give – that is because they have never truly owned or resided at the Property – they are simply there to facilitate the foreclosure process. That means there are risks for you as a Buyer which include:

1. You must conduct your own due diligence and be thorough about it;
2. The Property might have serious compliance issues
3. There might be serious hidden defects in the Property;

4. There may have been criminal activities in the Property that render it uninhabitable;
5. The appliances may not operate or even be in the Property;
6. The Owner may have sabotaged the Property on purpose;

7. There may not be permits in place for development;
8. The Property may be further damaged between the time of your Offer and the closing; and
9. The endless list of other potential issues.

Can You Avoid the Risks?

As a Buyer you are very limited in your ability to avoid all of the risks of a foreclosure, but you can certainly minimize them. Amongst the things you can do include:

1. Reviewing the title with your lawyer;
2. Complete as many inspections as you can or are permitted;
3. Confirm whether the owner is still in possession or is the property tenanted;
4. Contact the City to determine if there have been any permits applied for and whether they are completed;

5. On closing, ask your lawyer to obtain title insurance for you;
6. Make sure your Realtor is well aware of the foreclosure process;
7. Employ legal help sooner than later; and
8. Don’t assume you have any protections whatsoever. This is a dangerous pitfall that can cause your nothing but harm

Understanding the Ins and Outs of buying a foreclosure/Judicial Sales is where we can step in and help you out. Don’t hesitate to contact us for assistance and advice. Understanding your risks right at the start can make this an option for purchasing that you wouldn’t consider otherwise. Call us at 403 245 3500 or email us at [email protected]

Purchasing The Property You Expected

Date: November 6th, 2019
By: Ron Thibeault

The proverbial “Wolf in Sheep’s Clothing” is what we all want to avoid.

We all make assumptions based on what we see or what we think we see. Buying a property is no different. We look at the fences surrounding a property and assume that they outline the property lines; we look at a beautiful greenhouse and assume it was built properly and in the right location. The reality is that our assumptions are often not correct.

An example of this is where a property backs onto a green space. You assume the back fence is on the property line but it actually goes 15 metres back into the green space and the yard is actually smaller by that amount.

You bought the property assuming that the yard was massive and now it turns out that the City requires that the fence be relocated to the property line.

Are Real Property Reports A Solution?

The current contract requires that the Seller provide the Buyer a Real Property Report (“RPR”) at least 10 days prior to the closing day. The problem is that even if that contract term is adhered to, the transaction is typically unconditional at that point and there is little time to deal with the relevant issues. There are questions of what your rights are should a problem be discovered at that point.

Ultimately, standard real estate industry practices are responsible for these problems. When a Seller lists a property with a real estate agent, the Listing Agreement stipulates that the Seller has a RPR that reflects the current state of the improvements on the property.

Effective agents will check on this and follow up knowing that the RPR can become a significant problem. Unfortunately, some real estate agents still don’t follow this most basic of requirements and you are left at risk as a result.

Making Your Offer

Before you submit an offer on a property, make sure that your agent is aware of your concerns. Have your agent make the necessary enquiries and seek to obtain a copy of the Real Property Report prior to submitting your offer.

If it isn’t available, ask why and structure your offer accordingly to ensure that you know what it is you are purchasing.

Becoming a High Impact Realtor Protecting Yourself and Your Client

Date: May 5th, 2016
By: Ron Thibeault

One of the occasional and more serious complaints from clients that we hear as real estate lawyers is that the house buying process passed them by. Usually, this was followed by a complaint that the real estate professional really didn’t work for their money.

The end result for the real estate professional was that here was a client that was not going to return in the future. Either the client would hire another Realtor and negotiate very hard on commissions or else they would go the FSBO or discount route. In either case, the result is an additional force on Realtors to decrease fees in order to win work.

Well, there are some things that are beyond your control in preventing this situation, such as the work of the opposing Realtor and how the buyers and sellers react to negotiations. However, there are a number of things that you can do that will help alleviate this situation and help prevent it from arising. The end result is happier clients overall and more repeat business.

1. Go through the listing contract
This may seem obvious but it is amazing how many times clients feel that they did not go through the listing contract OR that they did not understand it in the least. You may go through the contract with your client but are your certain that they understood what you said?

Clarity is everything when it comes to contracts. Unfortunately, even the contracts that claim to be in “plain language” are couched in legal concepts that are vital to understand. In my jurisdiction, the listing contract states that clients are to seek the advice of counsel before signing the listing contract. Guess how many of them seek counsel… right… nearly zero! So this means that YOU are their source of reference for this contract. It is imperative that you understand the Listing Contract before you present it.

2. Explain the selling process to your client
Here’s another thing that gets overlooked continually. At the heart of this problem is the fact that clients don’t perceive you to be working hard on their transaction. This is more of a problem for sellers than for buyers. They see you place a sign on the lawn, maybe they see your ad in the paper and maybe they see you at an open house or two. Ever wonder why they question your fees?

Clients don’t understand that there are a number of things that a Realtor/Agent does behind the scenes or that there are a number of costs associated with their transaction. This is your job to ensure that they understand what you will do BEFORE you start.

Too often, this is the subject of discussion after the client grumbles about the fact that nothing was really done to sell their house. Waiting until that complaint arises is too late and results in a lost client. Outline to the client exactly how you will market their house. Ask for any suggestions that they might have (you might learn something). In other words, involve them in the process. The result will be more work in the future.

3. Explain how the offer/counteroffer process works.
The most frustrating time for a client is the actual negotiation of a potential sale. Remember that most clients never negotiate contracts larger than a home sale or purchase. This, combined with the stress of buying or selling an item of emotional attachment, is a recipe for complaints.

Clients should understand right from the start that not every negotiation leads to a sale or that every negotiation will be smooth. One of your jobs as a real estate professional is to help your client through this process. One of the keys to helping your client is to have them understand what may happen before it happens!

The time to explain potential changes to a clause is at the original time of listing. For example, in our jurisdiction, the seller is to provide a current Real Property Report. Guess how many times that clause is changed without advising the clients of potential issues? Guess how many times clients complained about the change years later when they went to sell and were forced to provide a new Real Property Report at their cost?

In that case, clients should have been aware going into a negotiation that the seller may try to change that clause and what the potential results may be. Again, this is where you can rely on your professional team to help you out. Have your trusty lawyer prepare a document outlining which sections are most likely to be changed and what the effect of those changes can be.

4. Don’t’ Pull a Houdini!
Did you know that a number of clients, and lawyers for that matter, believe that you disappear the minute the deal is signed and all conditions are waived? This is one perception that is hard to deal with but severely impacts your overall relationship with clients.

You know how hard you work after a deal is closed but does your client know it? Not likely because what you are doing is likely working behind the scenes phoning the bank, phoning the lawyer, phoning the other realtor. Your client has absolutely no idea this is happening unless you tell them!

The catch-22 of this is that if you aren’t telling them and a problem arises the perception is that the client is left to deal with it on their own. If you aren’t telling them and the deal goes smoothly the perception is that you weren’t really needed! How can you combat this?

The first thing to do is to phone your clients regularly after the deal is firm but is not closed. Keep them up to date on what everyone is doing. Show yourself to be the commander in chief, the general of this white collar army!

The second thing you can do is to provide written updates to your client either via the mail or via email. Have an assistant prepare a daily log of things that are happening or will happen on the deal. Send this to the client and keep them informed. Clients have a sneaky way of associating closest to the party that gives them the most information.

Finally, you can do the little things. For example, why not offer to drive your clients to the bank to finalize their loan or drive them to the lawyer’s office to sign papers. They may not need your service but what does it do for the impression of your service. The offer itself is what is important. I know of one Realtor who has a 18 year old daughter in University. She provides babysitting to his clients with small children for when they go to see the lawyer. He pays her for the service, helps her with pocket money for school, gets the tax deduction and gets the reward of his clients loving him even more!

These are only a few things that you can do to help your clients negotiate their way through a house transaction. The key is to remember that client servicing does not end at the signing of a deal and that your clients must know that. You work hard for your money… isn’t it time that your clients know that?

Sellers Going Across Borders They’re Moving….You’re Shaking!

Date: May 5th, 2016
By: Ron Thibeault

What do you do where you are the listing realtor in a transaction where the sellers are leaving Canada or have already left before the transaction closes?

Section 116 of the Income Tax Act requires that 25% of the sale price be withheld until a compliance certificate is obtained where you are dealing with non-residents. The Income Tax Act contains no definition of residency and the CRA will consider each case on its merits. The primary residential ties of an individual are his dwelling place, spouse and dependants and personal property and social ties. As you know, there is no capital gains tax on a principal residence but did you know that when the CRA looks at an application for a compliance certificate they will not issue one when there are outstanding debts that the seller owes to the CRA unless those debts are paid.

The question of whether the sellers are residents of Canada for tax purposes can be complicated. The sellers generally consider that if they are non-residents and the 25% holdback is in effect then someone is punishing them when it is simply the requirement of Section 116 of the Income Tax Act which is put there to protect the purchaser because if money is owing to the CRA, the CRA will go after the purchaser.

If you are the listing realtor and your seller is leaving Canada then be proactive. Make sure the seller’s lawyer gets the offer once the conditions are removed so that the application for the Compliance Certificate can begin immediately. It could take 2-4 months to obtain. Have the sellers talk to a tax accountant or lawyer so they can get correct advice from the start. Often, if the husband is working out of Canada but his wife and children are still here, then all will be considered residents of Canada for tax purposes.

The best solution for everyone is that the sellers stay in Canada until they are paid out on the sale or at the very least, that the wife and children are here at closing.

Bill LeClair

Not All New Home Warranty Programs are Created Equal

Date: April 14th, 2016
By: Ron Thibeault

I have recently been involved in 2 different transactions where a smaller builder provided their own “warranty” for defects and then offered a new home warranty from Progressive New Home Warranty.

Where you are acting for a Buyer on a purchase from a Builder, even if your client is prepared to accept the Builder’s own “warranty” there is the question of whether their lender will accept that. In most cases the answer will not be positive: normally the lender will require some level of third party warranty against structural issues. Part of your role is to ensure that this issue is addressed within the Offer.

Importantly for your client, most major programs provide coverage for them as well for deficiencies at walkthrough. This is not the case where the Progressive Home Warranty Program is used. In both of these cases I mentioned the Builder used the Progressive warranty. The clients were lulled into a false sense of security on the issue as there is a specific exclusion that reads as follows:

“Items requiring repair or not list as acceptable on the following checklist are considered deficiencies and are NOT covered by warranty. These items or any other items that would be noticed through a reasoanble and prudent inspection at time of Possession, are not defects and are therefore subject to the terms and conditions of the purchase contract and are not covered by warranty”

Effectively your clients are left with absolutely no recourse should the Builder not complete any walkthrough deficiencies. Ultimately, this is the main purpose of why people need 3rd party warranties: to protect against the Builder NOT completing or performing their obligations. The Builder’s own warranty is useless because it is the Builder who has failed to do something!

Ultimately this means that you must be very vigilent when drafting offers for new homes covered by this program. In particular, you have to ensure that there is a reasonable way to employ and enforce a holdback for deficiencies that covers your client in case they need to hire a 3rd party contractor to complete work that the Builder is unwilling or unable to complete. The value of that holdback should be determined by a proper inspector who is familiar with the type of construction involved.

Failing to deal with these matters up front can and will cause serious issues at closing as these type of contracts are usually signed on the standard form Offer to Purchase which gives very limited rights to the Buyer at closing. Ultimately, a Builder’s own “warranty” is worth absolutely nothing. For your clients, some 3rd party programs may offer little more.

Ron Thibeault

The Dangers of Clause 6.1(g) Standard Forms Gone Amuck

Date: April 14th, 2016
By: Ron Thibeault

Perhaps one of the biggest challenges to face Realtors in the last several years is starting to have serious and negative impacts on our industry. The change in question is the amendment to the Real Estate Purchase Contract by the AREA Forms Committee to include the new clause 6.1(g). The consequences of this change, if they weren’t fully understood, should have been as it is literally causing havoc in the industry.

If you aren’t familiar with it, clause 6.1(g) outlines that the property complies with any registered restrictive covenants (“RC’s”). This sounds inconsequential but in reality it is already causing deals to close late or, in the worst case, to be terminated.

Effectively, as a result of this clause your sellers are now warranting that the property complies with any restrictive covenants on title (old and new RCs). This doesn’t seem to be that big an issue until you understand that prior to this change there was no such warranty meaning that Buyers who purchased properties with these old RCs on them before the change in the Contract are now required to deal with these and are responsible for the costs associated with the attempt to remove or amend the RC; the problem is that it isn’t always possible to do so.

On a number of properties in the City there are old RCs from as far back as 1908 that contain restrictions on how a property can be developed. Some of them, and these are fun to read like a time capsule, restrict an owner from having pigs, horses, brothels, drinking houses on the Property; some however, are far more problematic in that they limit the distance from the street, the number of dwellings per frontage, the size of the property, etc. Some of these are referred to as “building schemes” and they can affect 100’s of properties in a neighbourhood.

The history on this issue will help you understand why this is such a problem. Prior to this change, the issue of old RCs was effectively ignored once a Buyer had executed a Purchase Contract and had waived conditions. The reason for this was simple; the Standard Contract did not contain a warranty with regards to them. The prior Contract simply sought out City Compliance on a RPR and if you have ever read a Compliance Stamp it clearly excludes any opinion as to compliance with RCs.

Effectively, these could be ignored unless the Buyer, pre-offer, made it an issue in a contract through the insertion of either a term or condition relating to this. In fact, we often recommended this to Buyers who had intentions of using the property for the purposes of further development. At that point, if the Seller accepted that term or condition they would be obligated to resolve the issue (the key being “if the Seller accepted”).

Now with the change approved by the AREA Forms Committee the obligation to resolve any issues with a RC is imposed on the Seller with the situation being that these issues are sometimes very difficult to resolve. In some cases, the Courts will require notice of the application to amend or remove a RC be given to all of the affected parties that can sometimes number in the 100’s; any person coming forward to dispute the removal can effectively result in the application failing. Effectively, there are now some unmarketable properties in Calgary notwithstanding the fact that they may have been bought and sold any number of times in the last 50-100 years. Every lawyer in the province now has these potential issues on any number of files and, as a result, so do a number of Realtors.

In a recent case in our office, my clients bought a new home from a Builder. The standard AREA Resale Contract was used; including clause 6.1(g). On title was a 1951 RC that outlined any development could be no closer than 27 feet from the any street or avenue fronting the land and no more than one home per 50 feet of frontage (I assume that when the Builder bought the lands there was only 1 home and that they didn’t review the title prior to buying the land).

The RPR was not delivered to our office in time for the closing so the deal was delayed until that was available as per clause 4.5 of the Contract. We had identified the potential issues to counsel for the Seller earlier with regards to the RC but these concerns were not addressed until close to the Completion Day. The Sellers’ lawyer assumed (wrongly) that all we needed was a compliance stamp and not a confirmation that the property was not in contravention of the RC.

When the RPR was received at our office, the front of the home was only 21 feet from the property line and not the required 27. Second, this was an attached dwelling on 25 feet of frontage. Both of these put the property offside of the RC.

As a direct result of clause 6.1(g) our client was left on the scheduled Completion Day not taking keys while the issue was being resolved. In this case the transaction was delayed over 45 days while the Seller’s lawyer dealt with how to remove the RC; my client was not prepared to accept a risk that the marketability of the Property would be reduced if the Covenant could not be removed.

To understand the risk here, if the RC couldn’t be removed (as will be the case in some situations) my client was prepared to walk from the transaction meaning a lot of work and effort would have been wasted by every professional on the file. Fortunately, our efforts resolved the issue for both our client and the new owner of the lot next door whose purchase had closed without their counsel noticing the issue or resolving it. But again, the delay cased both stress and a level of uncertainty that was unnecessary but for the existence of clause 6.1(g).

Coincidently I have another client in our office as this is being written whose sale cratered because of an old RC. My Sellers purchased the property prior to the change when there was no warranty in the Standard Contract and are now selling with that warranty in place. A prospective Buyer received legal advice about the old RC that indicated it may be problematic. Needless to say, my clients are shocked that they now have to resolve this issue notwithstanding the fact that everyone before them had no such obligation to an old 1938 RC.

All of this could have been avoided by either not making the change or, alternatively, grandfathering any property constructed before the date that the change in the Contract was made. Now, we have a serious and ongoing problem that is causing serious issues for innocent Sellers; sometimes changes that sound good in theory have serious and unintended practical consequences.

In the end, as a Realtor you have to ensure that:

  1. When acting for a Seller you pull title and ALL RC’s that may be of concern and review the RC’s on that title prior to accepting the listing. Failure to do so means you may have a property that is effectively unsellable if clause 6.1(g) remains in the Contract;

  2. When acting for a Buyer, you pull title and ALL RC’s that may be of concern and review the RC’s on that title prior to submitting the Offer. Notwithstanding the fact that the Seller has to deal with the issue, because they may not be able to remove the RC you have to ensure that your Buyers aren’t left with nowhere to go on the day of Closing or are forced to close in less than optimal circumstances;

  3. If you are acting for a Builder client who wants to build and subdivide lots, you MUST insert a condition of review of the title and encumbrances to the satisfaction of your client;

  4. REMEMBER – Compliance from the City is not evidence of compliance with the restrictive covenants registered on title; and

  5. Start to take an active interest in changes to your Contracts and contact AREA and voice your concerns with regards to changes like 6.1(g) that don’t really make sense given the history of this issue.

Ron Thibeault

Understanding Collateral Mortgages When Mortgages Don’t Add Up

Date: April 14th, 2016
By: Ron Thibeault

I would hazard to guess that every Realtor in Calgary (and the rest of Canada) has been mystified when they see a mortgage registered on a title that is for the same amount as when your Seller purchased the home. I know because I have received a number of phone calls about this very issue.

The concern for you as an agent is to ensure that there is enough equity in the Property to satisfy the terms of the contract but also ensure that you get paid; this is after all an occupation and not a hobby. What you likely don’t know is that your Seller likely executed a newer product called a collateral mortgage that most banks are now pushing their clients into. In most cases, it isn’t properly explained to your clients and they have no idea what they have agreed to.

Not so long ago, your clients were offered 2 main products as a “mortgage” solution: either a fixed rate mortgage that was registered for a set amount at a set rate or a line of credit where the security is registered for the maximum amount approved at the approved rate; pretty straight-forward in terms of understanding. If ultimately you were having issues with your lender you could talk to a competitor, pay a nominal fee (often waived) and walk across the street. This has changed with the use of collateral mortgages.

A collateral mortgage is effectively a promissory note that is secured by a mortgage on a property. The promissory note can be for significant value even though the Buyer did not borrow that much money. Typically what you see are collateral mortgages registered for the purchase price (or appraised amount if it is higher). The rate on the registered mortgage is also significantly higher than the client agreed to (Prime + 10% for TD, Prime + 7% for RBC, etc.). Effectively, what lenders are doing is finding a way around the maximum allowable security by making the mortgage security for a separate promissory note.

What your client hears when discussing this with their lender (if it is discussed at all) is that this is a great product that will allow them to borrow future advances as long as the property qualifies, they qualify, the loan never exceeds the registered amount or the registered rate. To your clients this sounds really exciting because they can save on future legal fees and have fewer issues should they need or want more money from the lender. However, there are some negative aspects of this loan that need to be divulged.

There are some issues that Buyers have to be aware of when the lender “fits” them into a collateral mortgage. Most importantly, there is a reduction in the flexibility in changing banks. If you have a collateral mortgage you cannot simply “transfer” to another institution like with a standard mortgage. You will have to discharge the collateral mortgage and reregister another mortgage with a different lender; all at your own costs. If you want to do this mid-term in your mortgage you will also have to pay any mortgage payout penalties that are included.

Another issue relates to obtaining other loans from different lenders. Because the collateral mortgage has a right of re-advance (i.e. additional money can be advanced on it) subsequent lenders will look to the maximum that can be advanced on the loan and not the balance when making a decision on a loan. Say for example you have a collateral mortgage for $500k on a home that is valued at $500k but the balance you owe is only $200k. You find out that a different lender is offering great rates on home equity lines of credit. When you approach that bank thinking that there is about $200k of equity left over ($500k x 80% = $400k – $200k balance = $200k equity) you will be denied because the collateral mortgage, which is a first charge, can always be brought back up to $500k meaning there is potential no equity for the 2nd lender to attach to.

The final issue with some collateral mortgages is that they can be used to secure more than just your home. In some cases, lenders include other loans like credit cards, etc. In return the client usually gets a secured rate on those products. The danger with this type of product is that other debts secured by the collateral loan could result in action being taken again everything secured. On other words, defaulting on a credit card could technically result in action against your home. Not all lenders use this form so it is important for a client to ask their lender about this issue specifically.

Are collateral mortgages a good change? Depends on who you are. In the majority of cases, clients have long standing relationships with their lenders and in other cases people rarely change lenders other than when they are selling their property. Whether it fits for your client is a question that their mortgage broker or lender has to address with them. The key is for them to address it early and not wait until the client attends the lawyers’ office to find out what they have agreed to.

Ron Thibeault