Do These 5 Basic Things to Avoid Defaulting on Your Mortgage
When you sign a Deed of Hypothec, the Notary explains your legal obligations to you so that you are signing your contract in full understanding of what is expected from you as well as the legal consequences of being in default.
What is a Hypothec?
The Hypothec, or mortgage, is the right that gets registered against the property you are purchasing. It is a right you give to your financial institution in exchange for a loan. Upon registration, the Hypothec appears at the Land Registry and allows the financial institution to “follow” the property. This means that the financial institution will be alerted if any new right becomes registered against the property that could hinder their rights in any way. Your main obligation towards your financial institution is to maintain what is called a “first ranking Hypothec” at all times, meaning that the rights of the financial institution on this property take precedence over any other creditor’s rights.
What are my obligations as a borrower?
When purchasing a residential property, all borrowers have the same basic obligations:
1. Paying your loan on time. You must respect the payment schedule set forth in your agreement with your financial institution. In some cases, you will be permitted to change the payment frequency (for example, you might want to switch from a monthly payment to a bi-weekly payment). If you would like to make changes to your payment schedule, you must contact your financial institution to ensure that this is properly set up to avoid issues or penalties.
2. Maintaining a damage insurance policy. Your financial institution will have strict requirements regarding the damage insurance you will be required to obtain and maintain. The requirements will vary slightly depending on the financial institution and whether you are purchasing a single-family home, a condo, or a multiplex. However, a valid damage insurance policy must be maintained as long as you have a registered mortgage against your property. Your financial institution must appear as the creditor on the policy.
3. Paying your property taxes (and condo fees). Failure to pay property taxes, including municipal and school taxes, can lead to the city or school board registering legal liens or Hypothecs against your property. These Hypothecs have priority over the rights of your financial institution. This means that if you do not pay your taxes, you open yourself up to the possibility of the city or school board registering a Hypothec which will cause your financial institution to drop to a second or third ranking Hypothec, which is not permitted. Should this occur, your financial institution will be notified. It should be noted that if you are purchasing a condominium, the Syndicate of Co-Ownership may also register a Legal Hypothec for unpaid condo fees, special assessment fees, and any other fee or payment due to the Syndicate of Co-Ownership.
4. Paying your contractors. If you hire any contractor to do major renovations on the property, you must pay them upon completion of the renovations, failing which they may also register a Legal Hypothec against the property. Note that the right to a Legal Hypothec exists also in favour of the architect, engineer, supplier, workman, contractor and subcontractor who have worked on or have supplied materials for your renovations.
5. Maintain the value of the property. You must take care of your property and upkeep it as needed. You must not permit the property to lose value through negligence. It is expected that you are to always justify your loan – your financial institution lends you a sum of money based on their evaluation of the property. Therefore, you must maintain this value. If you do not, it is possible that at the end of your term, they refuse to renew your contract.
What are the consequences of being in default and how can I correct the issue?
Before beginning any legal recourse, the financial institution must first advise the borrower of the exact nature of their default. The borrower will receive an official notice to this effect. From the moment they have received this notice, the borrower has sixty (60) days to act to protect themselves and their ownership title.
Within those sixty (60) days, the borrower has two (2) options:
1. Simply correct the issue. Make the payment(s) you are defaulting on, provide the proof of damage insurance, pay off your taxes, etc. If this is corrected, the financial institution will not push any further. You may have a mark on your financial record indicating that you were in default, however your ownership title is safe. It is important to note that defaulting on a regular basis can result in the financial institution’s refusal to renew your contract at the end of your term, even if you correct the issue upon receiving notice.
2. Sell your property. If you find yourself in a situation where you know that you will not likely be able to continue respecting your payment schedule or other obligations, your best option is to sell your property. In doing this, you will reimburse the loan in its entirety with the proceeds of the sale. This is your best option in a bad financial situation because you will be able to keep the sale balance for yourself once the loan and other closing costs are paid off.
If this delay has passed and you have not corrected the issue, the financial institution will be in their rights to intend a recourse against you. The legal recourses available to them are the Taking in Payment and the Sale by Judicial Authority. The financial institution will have discretion to determine the recourse they will take. The recourses differ slightly, however both instances result in the loss of ownership for the borrower.