Podcast Episode 7: “Mortgage Basics 7/9 – True and False 1.”
Having covered the different types of mortgages in the last few episodes, this podcast turns to frequently asked questions. Is it really true that Albertans can’t be held personally liable for conventional mortgages? What if I my mortgage is in a holding company? There are so many permutation and combinations
Mortgages: True or False
With this brief summary of mortgage law, let’s have some fun with true and false questions:
Question # 1: I bought at the height of the boom with a 25% down payment in my own name. Turns out, I overpaid. My ‘area in transition’ has not transitioned. Prices have dropped like a rock. I can’t rent the property for enough to make my payments and nobody wants to buy the property from me. Some dude told me I can walk away from the property and the lender can’t come after me personally.
Answer: True. In Alberta, there is no personal liability by individuals on conventional mortgages whether it was your brand-new mortgage or whether you assumed the mortgage from another individual.
Question # 2: Instead of a 25% down payment I actually only put up a 5% down payment. The good news is that I’ve got an offer to buy the house, even if it’s for less than I paid. The catch is that my buyer wants to assume my mortgage. I’m worried that the buyer might default but I’ve been told that my liability ends once the buyer keeps the mortgage payments up for one year.
Answer: False. This is a common misconception. While CMHC (and possibly Genworth) may have a policy of not pursing previous borrowers if the current borrower maintains the mortgage for a year, there is nothing preventing them from doing so. Policies are great, but policies are not law and policies can change. The only true protection that can be provided to the seller is a formal release or at the very least, a release letter issued by the lender. If you want to sell a property and allow the buyer to assume your mortgage, you can make the release a condition of the sale. In today’s non-assumption environment, do not think that lender approval to assume the mortgage means you get an automatic release. You don’t!
You have to ask for it. If the lender approves the assumption, but won’t give you the release, you should mark your calendar for 12 months after the sale. At that time, if there has been no default, you should follow up with the lender and CMHC and try to obtain from them formal recognition that you are no longer liable. To avoid privacy issues you would have to have a condition in your sale contract that survived closing allowing the lender to advise you whether or not the borrower continued to be in good standing 12 months after closing. This is all a little tricky and the best protection for you is not to let anyone assume your mortgage.
Because of amendments made to the Law of Property Act, and in effect August 1, 2004, all insured mortgages funded after that date create personal liability for any individual registered as the owner of the property at any point in time during the life of the mortgage.
Question # 3: I bought a property through my real estate holding corporation, and paid a 20% down payment. Now things have gone south and I need to bail out. I’ve heard that there might be a problem if I just walk away from the property.
Answer: True. For a corporation, as for any individual with a high-ratio mortgage, the covenant to pay is always enforceable meaning that the corporation will be on the hook for any deficiency.
Whenever you’re dealing with mortgages, take the stress away by getting help from an expert Alberta real estate lawyer. Contact Barry today!