I. Private Funding
A. Funding Arranged by Borrower
A "private" mortgage is one obtained from an individual or entity that is neither a bank listed in Schedule I or II to the Bank Act, S.C. 1991, c. 46 (Canada), a licensed insurer, a registered loan or trust corporation, a subsidiary of any of them, a pension fund, or other entity that lends money in the ordinary course of its business. Private funding obtained from a friend or a relative is usually the least expensive source of financing. This is because this type of lender will generally lend at a lower rate of interest than the current market rate, will not charge brokerage or appraisal fees, and will not request mortgage insurance. Furthermore, in general a single lawyer may act for both the lender and the borrower, which will save the borrower the extra expense involved in the duplication of legal fees. However, the scenario involving a single lawyer acting for both lender and borrower will be subject to strict Law Society directives. First of all, a lawyer (or two or more lawyers practising in partnership or association) are allowed to act for both borrower and lender in a mortgage or loan transaction only where:
- the lawyer practises in a remote location where there are no other lawyers that
- either party could conveniently retain for the transaction;
- the mortgage is a vendor take back mortgage;
- the lender is a bank, trust company, insurance company, credit union or finance
- company that lends money in the ordinary course of its business;
- the consideration for the mortgage or loan does not exceed $50,000.00; and
- the lender and borrower are not at arms length as defined in the Income Tax Act, (R.S.C., 1985, c. 1 (5th Supp.)) (Canada).
In situations involving private financing—and particularly where the buyer's lawyer acts for the private lender as well—it is important for the lawyer to ascertain the exact legal identity of the mortgagee, the location of the bank branch at which the transaction will be undertaken, and the names of any necessary contact individuals for both the lender and the bank. Lawyers should be careful when structuring private mortgages, specifically to ensure that the mortgagee obtains the proper security over the loan. Although under equitable principles a court will look beyond the form of an instrument to determine the intention of the parties, it is important to ensure that the transaction has the effect of setting up a security, rather than an outright sale in the form of an absolute conveyance (see, for example, Oland v. McNei1). On the other hand, regardless of the format that the parties' agreement may take (whether as an absolute conveyance or otherwise), the parties' intention to create a security may be established through the use of evidence: see Wilson v. Ward.
B. Funding Arranged by Mortgage Broker
A mortgage broker may also be able to arrange private funding. However, the borrower will be required to pay both brokerage fees and appraisal costs, making this method of financing one of the most expensive. Commission and appraisal fees may be payable in advance and are not usually refundable if the transaction is not completed. In other instances, these costs are deducted from the amount of the mortgage advance on closing. Therefore, since the borrower may receive less than the full amount of principal on closing, he or she must calculate the funds necessary for closing accordingly. In addition, if the broker or the private lender insists on using his or her own lawyer, the borrower will be responsible for payment of the broker's or lender's lawyer's fees, as well as the borrower's own lawyer's fees. Mortgage brokers are currently regulated by the Mortgage Brokerages, Lenders and Administrators Act, 2006, which replaced the Mortgage Brokers Act, effective July 1, 2008. Mortgage brokers licensed under the MBLA are often able to obtain mortgage funding for those people who have not qualified for funding through institutional lenders. The mortgage rate may be higher for many reasons, including the risk involved. In some cases, the funding obtained through the broker will be with an institutional lender. Under sections 6 through 9 of the Cost of Borrowing and Disclosure to Borrowers Regulation, under the MBLA, mortgage brokers are required to provide borrowers with a written disclosure statement detailing the terms and various other specific aspects of the mortgage. The mortgage will be rendered invalid if the broker fails to do so: see Serm Investments v. Forrest, where the court held invalid a mortgage in a case where the requirement statement was not provided, finding that the mortgagors had been prejudiced. Once a borrower has arranged for financing through a mortgage broker or otherwise, the lawyer acting on the transaction is required to advise on, and take the necessary precautions in connection with, the protection of his or her client's interests. In Rabi v. Rosu, the Ontario Superior Court of Justice commented on the impersonal nature of modern-day mortgage lending and borrowing, stating that in the case before it, more care should have been exercised given that a sum in excess of one-quarter of a million dollars was being advanced.
II. Institutional Mortgages
Institutional mortgages comprise the most common method of financing residential real estate transactions. Although each institutional lender will have its own policies and criteria in relation to mortgage lending, the cost of borrowing frequently includes an application fee as well as an appraisal fee. Less frequently, the lender may insist that its own lawyer act in the transaction. In any event, all legal fees and other costs will be the responsibility of the borrower. Institutional lenders require borrowers to satisfy stringent criteria before they are willing to advance funds. The borrower will bear the cost of the requisite up-to-date building location survey, unless the agreement of purchase and sale provides otherwise. Recently, some lending institutions have relaxed their policy on up-to-date surveys; an existing survey that is not more than 20 years old may therefore suffice where: a) there have been no additions or alterations to the exterior of the premises and b) the borrower obtains a statutory declaration from the seller regarding the accuracy and completeness of the existing survey. As an alternative, lenders may accept a title insurance policy in lieu of an updated survey. Mortgages advanced in the context of a power of attorney may require special scrutiny.
Finally, and in light of concerns over mortgage fraud and money-laundering, institutional lenders may rely on the solicitor to confirm the identity of the borrower and to implement other screening criteria. The Law Society of Upper Canada has prepared a document titled "Due Diligence in Mortgage or Loan Transactions", which outlines the steps required of a lender to ensure that adequate care is exercised in the funding of mortgage or loan transactions and the steps required of a lawyer acting for a lender in such transactions. It is found in the Real Estate Practice Guide for Lawyers (June 2010), Appendix 16. The Law Society has also imposed "know your client" regulations, imposing certain client identification and verification regulations on lawyers.
Note that in connection with fraudulent mortgage transactions there are several decisions that consider a bank's potential liability for essentially failing to ensure that the borrower knew what he or she was getting into; such claims are framed in terms of breach of fiduciary duty, a duty to give advice, or explain to the borrower what he or she was signing. See Empire Life Insurance Co. v. Krystal Holdings Inc.,  O.J. No. 4661, 53 B.L.R. (4th) 234; Pierce v. Canada Trustco Mortgage Co.,  O.J. No. 1886, 254 D.L.R. (4th) 79 (C.A.); Baldwin v. Daubney,  O.J. No. 3824, 83 O.R. (3d) 308 (C.A.); MCAP Service Corp. v. McLaren,  O.J. No. 548 (Div. Ct.); Isaacs v. Royal Bank of Canada,  O.J. No. 2620, 2010 ONSC 3527 (S.C.J.).
Both the government and the regulatory body governing lawyers have implemented various other measures designed to counteract the rising incidence of real estate fraud, including: amendments to the Land Titles Act and the Land Registration Reform Act and its electronic registration regulations; the imposition of requirements for the registration of transfers of title and powers of attorney; amendments to the Rules of Professional Conduct and its Commentary relating to both "know your client" rules and electronic registration of land; and the Law Society of Upper Canada's Guidelines on Powers of Attorney in Real Estate Transactions. The borrower should ascertain from the lender which costs will be deducted from the mortgage advance on closing; this includes ascertaining which costs will be paid directly by the borrower and which will be withdrawn with authorization from his or her bank account.
The lender may hold back from the mortgage advance a sum to provide for the tax account. Provision must also be made for the payment of any mortgage premiums due around the time of closing. If the mortgage is a high-ratio mortgage requiring mortgage insurance, the insurance premium will be deducted from the mortgage advance. Institutional lenders generally prefer that payment of a mortgage be made on the first day of each month. Therefore, notwithstanding that monies may be advanced on another day of the month, the interest adjustment date in the mortgage will usually be the first day of the month next following the date of the advance, with the first payment date being on the first day of the following month. The lender will collect interest from the date advanced to the interest adjustment date. Notwithstanding that the mortgage provides that interest is to be paid "not in advance", the lender will often deduct the interest from the mortgage advance on closing.
III. Vendor Take-back Mortgages
A seller may offer to "take back" a mortgage (L e. act as mortgagee) on closing, usually as an incentive to make the transaction more manageable and appealing to the buyer. In such cases, the seller may provide certain concessions: for example, the interest rate may be less than the current market rate, and the mortgage may be fully open for pre-payment without notice or bonus. The terms of such a mortgage are open to negotiation, and effectively form a financial component of the prospective buyer's offer for the property. As with every mortgage, all of the terms should be agreed upon and set out in the agreement of purchase and sale, including principal amount, interest rate, term, amortization period, amount and composition of monthly payment or other frequency of payment, prepayment privileges, and whether the mortgage will be "due-on-sale." Standard form agreements of purchase and sale contain pre-printed clauses that may not reflect the parties' intentions; this leads to uncertainty and potential conflict in drafting the mortgage, and disputes and litigation when its terms are not uniformly interpreted by the parties.
Note that if a seller takes back a mortgage as part of the financing of the agreement, the seller's remedies with respect to that mortgage are governed exclusively by the law relating to mortgages; any subsequent proceedings are separate from those that may be taken with respect to the underlying purchase and sale transaction itself Where a buyer enters into an agreement of purchase and sale involving a vendor take-back mortgage and then subsequently wishes to assign the agreement to a third party, he or she cannot force the seller to accept a mortgage from that third-party assignee, unless there is a clause in the agreement permitting the assignment. Indeed, the seller may refuse to accept a mortgage from the third-party assignee on closing, and instead may require the buyer to give his or her personal covenant on the mortgage, notwithstanding that the buyer has assigned all his or her interest in the agreement to the assignee.
IV. Mortgage Insurance
Conventional mortgages involve the borrower providing a minimum 20% downpayment. High-ratio mortgages, in contrast, involve borrowers who are not able to provide the 20% downpayment; such mortgages require .mortgage insurance under federal law. Mortgage insurance protects the lender in case of borrower default, and is usually placed with Canada Mortgage and Housing Corporation ("CMHC") or with Genworth Financial Canada Mortgage Insurance Company Canada (formerly GE Mortgage Insurance Canada) ("Genworth"). The borrower pays the premium, based on the loan-to-value ratio; the premium can be paid separately on ckising, but is normally added to the mortgage amount and is paid over the length of the mortgage. Effective May 1, 2014, premium amounts range from 0.60% to 3.35% of the home's value, for homes with loan-to-value ratio of between 65% and 95%. The premium rates are scheduled to increase by an average of 15% effective May 1, 2014. A refund of up to 10% of the mortgage loan insurance premium is also available to buyers of new or resale energy-efficient homes. High-ratio mortgages are subject to more stringent restrictions than those imposed by institutional lenders on lower-ratio mortgages, and there are some restrictions, as to availability. Originally, CMHC eligibility was limited to first-time buyers, but this has now been expanded to include all home-buyers. Also, both CMHC and Genworth offer qualifying buyers financing for up to 100% of a home's value, provided that they have a proven track record of managing debt, as well as the financial capacity to afford home ownership. CMHC allows for the downpayment to be compiled by buyers from a variety of sources, such as lender incentives, lines of credit, credit cards and personal loans.
V. Government Programs
Periodically, both the Provincial and the Federal governments will institute programs to encourage the first-time home buyer. In the past, tax benefits have been provided for deposits into a registered home ownership savings program and both governments have provided special term mortgages or interest-free loans.
A. Land Transfer Tax Refund
In 1996, the Land Transfer Tax refund program was introduced, aimed at first-time buyers of newly-built homes. It was extended every year after 1996, and was made a permanent program on April 1, 2000, and has now been broadened to include both newly-built homes and resales. The eligibility requirements are as follows:
- the buyer must be 18 years or older;
- the buyer must occupy the home as a principal residence no later than 9 months after the date of the transfer;
- neither the buyer, nor his or her spouse (as defined by s. 29 of the Family Law Act, R.S.O. 1990, c. F.3) have previously owned a home, or an interest in a home, anywhere in the world while being each other's spouse;
-- in the case of a newly-constructed home, where the agreement was entered into before December 2007, the buyer must be entitled to a Tarion New Home Warranty; and
- the buyer cannot have previously received an Ontario Home Ownership Savings Plan-based refund of the applicable land transfer tax.
Note that there are special rules for situations where one spouse owned a home that was sold prior to marriage, with the result that the remaining first-time buyer spouse may be able to claim the total available refund. For these purposes, "spouse" includes a common-law spouse, as well as a same-sex partner. Also, note that in determining whether the applicant had an "interest" in a home prior to claiming a refund, the method of acquiring the home is not considered; this means that having a prior interest through a gift or inheritance will disentitle the applicant. Situations involving trustees who hold title in the home for the benefit of another party require evidence of the trust arrangement to be submitted to the Ministry of Finance. See Ontario Tax Bulletin LTT 1-2005 — Conveyances Involving Trusts at http://www.fm.gov.on.ca/en/bulletins/Itt/1_2005.html.
For agreements of purchase and sale entered into on or after December 14, 2007, the refund applies to all homes, whether newly-constructed or resale. In either case the application for the refund must be made within 18 months after the date of the transfer. For these purposes, "resale homes" include a detached home, a semi-detached home, a townhouse, shares in a co-operative corporation, certain mobile homes, a condominium unit, a duplex, triplex or fourplex, certain partial ownership interests as tenants-in-common, and specific manufactured homes constructed in off-site locations that are suitable for year-round residential occupation. Whether the purchased home is new or a resale, the maximum amount of the refund is $2,000 (the equivalent of the land transfer tax for a $227,500 new home, although there is no limit on the value of the home to which the refund may apply). If one or more buyers is not a first-time home-buyer (e.g. where an eligible child and an ineligible parent purchase a home together), the refund will be reduced in proportion to the interest acquired by the qualifying party. There are two methods by which a qualifying applicant may apply for an immediate refund at the time of the transfer:
- if registering electronically, the buyer can complete the required statements under the "explanation" tab of the electronic affidavit; or
- in the unlikely event that the registration is being completed by paper, the buyer may file an Ontario Land Transfer Tax Refund Affidavit for First-time Purchasers of Eligible Homes at the pertinent land registry office.
If the buyer does not claim the refund at the time of the transfer, then the tax is payable at registration, with the refund claim being made directly to the Ministry of Finance; the buyer must submit the same Affidavit together with a copy of the registered transfer/deed, and several additional documents. See http://www.fin.gov.on.ca/en/REFUND/newhome/ for a list of the required materials. For those home buyers who had participated in the now-obsolete Ontario Home Ownership Savings Plan, there is a specific form to be used when making an application for the refund of land transfer tax. See http://www.fm.gov.on.ca/en/forms/ltt/pdf/1201.pdf.
B. Home Buyer's Plan
The Home Buyer's Plan is a federal initiative allowing first-time buyers to withdraw and use money on deposit in their Registered Retirement Savings Plans toward the purchase of a home, without incurring the usual tax consequences of RRSP withdrawal. In a calendar year, an individual may use up to $25,000 in RRSP money towards the purchase of a home; spouses and common-law partners are also eligible to contribute $25,000, for a combined total of $50,000. The RRSP funds can be used for any aspect of the home purchase, including the downpayment, legal fees, disbursements, land transfer tax, home improvements or furniture and appliances.
However, in order to participate in the Home Buyer's Plan, the buyer must meet certain significant requirements. For example, the buyer (and his or her spouse, if applicable):
- must be a resident of Canada; · must be considered a "first-time homebuyer", as defined by the Income Tax Act;
- must have entered into a written agreement to buy or build a qualifying home for him or herself, or for a related person with a disability, which is intended to be used as a principal place of residence no later than one year after buying or building it:
- must have a Home Buyer's Plan repayable balance of zero as of January 1 of the year the withdrawal is to be made;
- must buy or build the qualifying home before October 1 of the year after the withdrawal is made;
- neither the individual, nor his or her spouse or common-law partner, must have owned the qualifying house more than 30 days before the withdrawal is made; and
- must have had the money on deposit at least 90 days prior to withdrawal.
All withdrawals must be repaid to the RRSP within 15 years of the withdrawal date. However, the commencement of the 15-year repayment period can be deferred for almost three additional years; once the withdrawal from the buyer's RRSP is made, the buyer has the rest of the withdrawal year, plus two calendar years, plus the first 60 days of the following year before the repayments need to begin. If in any year the required amounts are not repaid, those same amounts are included in the buyer's income for that year. Although initially the Plan was time-limited, subsequent amendments to the Income Tax Act, (R.S.C., 1985, c. 1 (5th Supp.)) have extended the Plan indefinitely for first-time buyers, effective March 26, 1995, as well as to existing homeowners who need to purchase a more accessible home for themselves or disabled dependent relatives. The plan has also been extended to allow Plan participants who have fully repaid their first fund withdrawal to withdraw a second time, provided that both the usual eligibility criteria are satisfied, and that there is a five-year gap between owning a home and the second fund withdrawal. Buyers should contact the bank in which their RRSPs are held for further information.
VI. Wage Earner Protection Program
Under the Wage Earner Protection Program Act, S.C. 2005, c. 47 ("WEPPA"), in force July 2008, employees are provided new super-priority rights in the event of the bankruptcy or receivership of their employer for: 1) unpaid wages; and 2) unpaid pension plan contributions. For any bankruptcies or receiverships occuring on or after July 7, 2008, these employee claims will rank ahead of all secured creditors, such as mortgagees, under a conventional mortgage. As such, these new super-priorities impact secured lenders, who — depending on the value of the security and the size of the employee group — may need to take steps to protect against the potential risk, for example, by revising their credit agreements to include specific covenants requiring employers to use third-party payroll services and to regularly report on their payroll and pension contribution activity. Note that pursuant to ss. 81.3(9) and 81.4(9) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, these super-priorities are effective under the appointment of both a conventional and interim receiver.