An informative article put out by a local Calgary Real Estate Lawyer
With interest rates steadily dropping over the past number of years, there hasn’t been much incentive or demand for buyers to assume existing mortgages from sellers. Since it appears that interest rates have “bottomed out” and most experts expect mortgage rates to rise in the near future, the demand for mortgage assumptions is likely to increase. As a result, this is a good time for a refresher on how to handle mortgage assumption transactions.
First of all I need to dispel a couple of common misconceptions. The belief that:
- all mortgages are assumable in this province; and
- a seller’s liability under a high ratio insured mortgage ends upon the buyer making twelve consecutive payments or upon the renewal of the existing mortgage term.
In the past, it was difficult for banks to prevent their mortgages from being assumed. However, for close to a decade the courts in Alberta have been enforcing “due on sale” clauses (the obligation of the home owner to secure the bank’s consent for a change of ownership) as part of the fight against mortgage fraud. What this means is that if a homeowner transfers the title without the involvement of the mortgage lender, the lender can foreclose on the property for that reason alone even if all the other obligations of the borrower (including all mortgage payments) have been honoured.
It is for the foregoing reason that the standard AREA Residential Real Estate Purchase Contract was amended in 2006 to incorporate an automatic “mortgage assumability” condition in clause 8.3. This condition ensures that if the lender does not consent to the Buyer assuming the mortgage, then the contract will terminate.
It should be noted that this condition is unique in a couple of respects. First of all, the condition is triggered automatically by the insertion of a dollar amount in the Assumption of Mortgage line of paragraph 2.2. Even if the parties overlook paragraph 8.3 and do not insert a Condition Date, the condition will still apply. Without a specified date, the condition will extend for a “reasonable” length of time. It goes without saying that the better practice is to insert a certain date for the expiry of the condition in order to avoid disputes. Secondly, this condition is specified to be for the mutual benefit of both the Buyer and the Seller and, as a result, has to be waived by both parties to firm up the contract.
In order to avoid disputes respecting the terms of the mortgage being assumed (interest rate, payments, remainder of term) the relevant portions of the Financing Schedule should be completed and the Schedule incorporated into the contract by checking off the relevant box in paragraph 7.5.
If the mortgage being assumed is conventional (non-insured), then this is as far as industry members need to go. The lawyers handling the closing of the transaction will order an assumption statement from the lender, adjust the purchase price and payments and handle the rest.
If, however, the mortgage being assumed is high-ratio insured, then extra caution should be exercised by industry members. The Seller will remain personally liable for any deficiency on the mortgage for the remaining life of the mortgage (including all renewal terms).
The twelve months payment rule, which was internal policy at CMHC only, no longer exists. The reality is that the Seller’s liability will only end upon the mortgage being repaid in full, and the Seller has to understand this risk prior to signing the acceptance of the offer. The only possible way in which the Seller would be protected against the risk of future default by the Buyer would be if the mortgage lender was prepared to “release” the seller from liability. While a Seller’s condition respecting the securing of such a release could be inserted into the contract, this is likely a waste of time as mortgage lenders have little or no incentive to grant it.
To ensure that the Seller’s problems do not become the problems of the listing agent, a written acknowledgment confirming the Seller’s understanding of continuing liability under the high ratio insured mortgage being assumed should be obtained prior to the execution of the contract and kept in the Brokerage file.