January 6th - 2004

Verify mortgage details up front

This is the first article in an ongoing series about OREA Standard Forms written by Geof Smith, who is OREA's Student & Faculty Services Manager and an OREA College instructor.

This is the first article in an ongoing series about OREA Standard Forms written by Geof Smith, who is OREA's Student & Faculty Services Manager and an OREA College instructor.

Many of OREA's standard forms are designed to meet a specific need in a real estate transaction. Form 261, Mortgage Verification, completed at the time of listing a property, provides REALTORS with a vehicle to verify pertinent facts relating to the financial aspects of the transaction.

Aside from RECO's requirement to disclose financial details, it just makes good common sense to discover the details of an outstanding mortgage on a property both for assumption and discharge purposes. There's nothing like a financial "surprise" such as a large mortgage discharge penalty to place a real estate deal in jeopardy at closing.

Some sellers are under the impression that they can discharge their existing mortgage prior to maturity at no cost or, at the very most, a three month interest penalty. That may be true if it's an open mortgage or the current rates being charged are the same or higher than the existing rate on the seller's mortgage and the mortgage document allows for early discharge.

But, consider a scenario where the seller's mortgage has an interest rate of 8% and the current rate for that remaining term of mortgage is 6%? How would the penalty be calculated now? How much would it be on an outstanding mortgage balance of $100,000 with three years remaining until maturity? Institutional lenders will typically charge the greater of three months interest or the interest rate differential. In the example, the penalty for three months interest would be $1,980.38 while the interest rate differential would amount to $6,210.00. Now consider a mortgage with no provision at all for early discharge. A mortgagee could legally demand all of the interest for the balance of the term as a penalty. In this example that would be well over $20,000.

Another instance when an additional cost may be encountered is when a seller is discharging a mortgage that was arranged involving a "cash back" feature. If this mortgage is being discharged before maturity, the mortgagee will require a pro-rated portion of the "cash back" to be repaid.

Your obligation may not include calculating the prepayment penalty for a seller but at the very least it must be brought to their attention that a penalty will likely be charged and it should be taken into consideration before accepting any agreement of purchase and sale.

RECO's Rule 5 states:
A member shall disclose the financial aspects of a transaction

Guiding Principle 5.1 states:
A member should, prior to the signing of any agreement, fully inform the Client or Customer regarding the type of expenses, without necessarily specifying their amounts, for which the person may normally be liable.

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Senior Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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