Mortgage - How Does A Mortgage Work?
Banks and other lenders make a profit through the lending of money to borrowers, and charging a fee for the use of that money.
The loan is repaid by the borrower over an agreed period of time, or may be paid as a lump sum. Interest (the fee charged for the
use of the loan money) is usually paid during the period of the loan.
While the borrower remains the actual owner of the property, the lender has the right to sell the property
or to acquire ownership of the property if the loan is not repaid.
Two meanings of mortgage
The term "mortgage" has two meanings:
- It is used to refer to the contract between the borrower (known as the "mortgagor") and
the lender (known as the "mortgagee").
- It is used to describe the right that a mortgagee has over the property of the mortgagor.
How does a mortgage affect the parties?
The lender and borrower enter into a formal loan contract. The
Credit Act requires that all
of the terms of the agreement (how much, interest rate, term etc.) must be included in the contract,
together with other compulsory information.
What is the relationship between the parties?
-
The lender makes a loan of money to the borrower in accordance with the terms of the loan contract.
- The borrower provides a mortgage to the lender by signing a formal Mortgage document. This Mortgage document is registered at
the Land Titles Office in accordance with the Transfer of Land Act.
- The Mortgage document contains certain "covenants" (promises) made by the borrower, including a promise to repay the loan by the due date, and to pay interest
on the loan.
- The lender gains an interest in the land, also known as a "charge" over the land, through operation of the . The Transfer of Land Act also
regulates the lender's interest in the land.
- When the loan has reached the end of its term, it is either paid out in full, or the lender may agree to extend the loan.
- When the loan has been repaid in full, the lender provides the borrower with a Discharge of Mortgage document. When the borrower has
this document registered at the Land Titles Office it has the effect of cancelling the lender's mortgage from the title.
- If the mortgage contract is breached by the borrower, the lender is able to exercise the right to sell the land to recover the outstanding loand or, in
certain circumstances, the lender may become entitled to become the registered owner.
The mortgage as security
Before lending money to a borrower, the lender wants to be sure that the loan will be repaid. Alternatively,
the lender needs to be sure that the borrower owns something of value that can be sold in order
regain the loan money if the borrower fails to repay it.
In order to determine whether the borrower represents a good risk, the lender will examine:
-
The borrower's ability to repay the loan.
- The security the borrower intends to offer.
- Ownership of the security, and whether anyone else is a part owner.
- Value of the security, and whether it is sufficient to fully secure the loan.
- The documents required to bind the security, the borrower, any other owner of the security, and the lender.
- The laws applicable to the loan (including the Consumer Credit Code and the Transfer of Land Act.
Covenants to protect the security property
Although the property still belongs to the borrower, the interest of the lender must be
protected. For this reason the mortgage will contain the covenants regarding, among other things:
-
Insurance.
- Payment of rates and taxes.
- Lender's permission before selling the property.
- Lender's permission before subdivision of the property.
- Early repayment of the loan.
- Default provisions.
- Borrower's duty to attend to repairs.
These covenants may be enforced under the provisions of the
Transfer of Land Act or the conditions
contained in the mortgage contract itself.
Mortgage documents
Under the
Consumer Credit Code, a lender who is providing funds under a regulated mortgage (i.e. one to which
the Code applies) must provide certain documents. Most lenders add documents of their own to this list, so that
the average borrower will be required to deal with:
-
Loan contract.
- General conditions of the loan contract.
- An information statement "Things you should know about your proposed Credit Contract".
- The formal Mortgage document for registration.
- Memorandum of Common Provisions.
- Other mortgage documents (which may include Direct Debit form, Requisitions on title, Authority to Complete, Direction to Pay, and others.
What happens if the borrower defaults?
If the borrower fails to repay the loan on the terms and conditions set out in the loan contract, the mortgagee has a number of remedies:
- Sue for breach of contract
- Have a receiver appointed
- Obtain a foreclosure order
- Sell the property to recover the amount outstanding
Of these remedies the most common used is the power to sell the security property. The mortgagee simply serves a notice on the mortgagor, telling the mortgagor of the mortgagee's intention to sell the property. The mortgagee is required to obtain the best possible price for the property, and if the amount obtain on the sale exceeds the amount payable to the mortgagee, then the balance must be paid to the mortgagor.
This is a very basic explanation of the concept of a Torrens system mortgage. For a more comprehensive explanation, please contact
Real Choice Mortgages.
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