Mortgage Exam Review 1-5 PDF

Chapter 1: Market Overview 1.1 What is a Mortgage Broker/Agent? There are two licenses for mortgages in Ontario: agent and broker. The regulator in Ontario is the Financial Services Regulatory Authority Ontario (FSRA), formerly known as the Financial Services Commission of Ontario (FSCO), changed...

Chapter 1: Market Overview 1.1 What is a Mortgage Broker/Agent? There are two licenses for mortgages in Ontario: agent and broker. The regulator in Ontario is the Financial Services Regulatory Authority Ontario (FSRA), formerly known as the Financial Services Commission of Ontario (FSCO), changed as of June 8, 2019. FSRA defines a mortgage agent as a “professional who deals or trades in mortgages for a licensed mortgage brokerage, under the supervision of a licensed mortgage broker. All individuals acting as a mortgage agent or broker in Ontario must have a license from FSRA. They must be sponsored by a licensed mortgage brokerage.” FSRA defines a mortgage broker as a “professional who deals or trades in mortgages for a licensed mortgage brokerage. They may also be responsible for supervising activities of one or more mortgage agents. All individuals acting as mortgage agents or mortgage brokers must have a license from FSRA.” The difference between a broker and an agent is that a broker can supervise agents (if allowed by the brokerage), and be the principal broker of a mortgage, a role that is required to provide effective supervision of the brokerage’s mortgage agents, among other duties. Each brokerage must have one principal broker to ensure that the brokerage, its agent and brokers, complies with the appropriate legislation and regulations. FSRA states, “the principal broker is responsible for the conduct of the Mortgage Brokerage and its Brokers/Agents.” ‘Effective supervision’ means that the principal broker can show that he/she has taken reasonable steps to ensure every requirement under the Mortgage Brokerages, Lenders, and Administrators Act, 2006 and regulations are met, and any contraventions are dealt with appropriately. 1.2 The Role of the Mortgage Agent A mortgage agent/broker can be defined as a practicing professional, licensed by FSRA, who assesses a borrower’s financial goals with respect to real estate financing and provides solutions to meet those goals by acting as an intermediary with the appropriate lending source. Typical activities of an agent/broker include: -Brokering a new mortgage, collateral mortgage, line of credit, or other type of loan secured by real property (which is land and whatever is affixed to it) through an institutional lender -Brokering the refinancing or switch of an existing mortgage through institutional lender -Providing mortgage advice and counsel, including renewal options. Mortgage brokers/agents can also provide specialized brokering, such as: -Private mortgages: buying, selling, and brokering mortgages between borrowers and private investors/lenders, and other mortgage investment entities (MIEs), such as MICs and syndicated mortgages. -Commercial mortgages: brokering mortgages for industrial, commercial, and investment (commonly referred to as ICI). In a brokered transaction, the agent has two clients: the borrower and the lender. In Ontario, the legal distinction between a mortgage a mortgage broker and agent is determined by licensing. Until July 2008, mortgage brokers had to be licensed in Ontario while agents were registered (not licensed) by their broker with FSRA. As a term, mortgage agent did not even exist in Ontario legislation until the Mortgage Brokers Act was replaced by the Mortgage Brokerages, Lenders, and Administrators Act, 2006. (2006 is part of the title, not established in 2006.) 1.3 Benefits of Using a Mortgage Agent In Ontario, borrowers can either go directly to a lender or they can get financing through a registered mortgage brokerage. Here are 5 of the most popular reasons why borrowers can benefit from using a mortgage agent: 1: Choice: brokerages have access to many lenders, like chartered banks, credit unions, monoline lenders (financiers that specialize in one type of lending), mortgage investment corporations (MICs), and private lenders. 2: Licensed Specialist: Expert advice. 3: Rates: since agents have more choice, they have access to special discounts (or rate specials), and generally brokerages will have access to the most competitive rates available. 4: Solutions: since a mortgage agent is responsible for solving their client’s problems, they can typically provide a better solution due to their larger access to different options (compared to a standard lender with only their products available). 5: Free, Expert Advice: since the lender pays the agent for the deal, the client doesn’t pay anything for the advice. 1.5 Industry Regulation The Regulator FSRA is the regulator for mortgages in Ontario. FSRA is established as a self-funded Crown corporation with a Board of Directors consisting of members who are appointed by the Lieutenant Governor in Council of the recommendation of the Minister of Finance. The Authority is accountable, through the Minister, to the Ontario Legislature. See page 10 for a summary of the regulated elements of FSRA’s day-to-day concerns as of December 31, 2021. In 2004, due to the increase in popularity of the mortgage agents and growth in the industry, the Ministry of Finance began the process of reviewing the Mortgage Brokers Act, the legislation in place at the time. The stated goals of the review were to ensure the legislation provided safeguards for the public, while giving mortgage agents fair and effective rules that encouraged industry growth and innovation. The Legislation The mortgage brokerage industry is regulated by one principal Act and its corresponding Regulations (including one that addresses Standards of Practice). See page 11 for a summary of the Act and Regulations in place. 1.6 Key Participants Mortgage Brokerage: is the licensed mortgage brokering entity. Every agent/broker must be registered with a brokerage. If the brokerage stops authorizing the agent then their license will be suspended (until hired and authorized by another brokerage). Principal Broker: is a licensed broker who is designated by the brokerage to be its chief compliance officer. Under the MBLAA, the brokerage is licensed, and it must have one broker that is licensed as a principal broker. This person is responsible for the activities outlined in Regulation 410/07, which defines the role of the principal broker. Institutional Lender: typically lenders are grouped either as a institutional or private lender. Institutional lenders include chartered banks, credit unions, loan and trust companies, finance companies, or other corporations constructed to lend money on real estate. Referred to as the ‘mortgagee’. Private Lender: typically an individual investor with funds who would like to invest in mortgages. This individual will usually invest through their lawyer who may have clients requiring mortgage financing or a mortgage agent. Typically private lending occurs for secondary mortgages due to their higher rate of return than primary mortgages (higher interest rates). Referred to as the ‘mortgagee’. Borrower: is the individual/individuals that are taking the loan and pledging their property as security. Referred to as the ‘mortgagor’. Institutional Mortgage Originator: several financial institutions have their own origination teams, referred to as ‘Road Warriors.’ These originators are compensated by their institution and are not consider ‘brokering’ a transaction since they are only using one lender. Lender Business Development Manager (BDM) / Business Development Officer (BDO): this individual is employed by the lender, and is responsible for generating business from brokerages. They typically provide training sessions for groups of agents/brokers, provide support for failed applications, and act as a resource for agents/brokers who need assistance with the lender’s products, underwriting guidelines, etc. Real Estate Salesperson: is the individual who brokers the purchase and sale transaction between a vendor (seller) and purchaser. Real Estate Appraiser / Real Property Assessor: the appraiser determines the market value of the property to be mortgaged. Real Estate appraisers do not need to be licensed in Ontario, but unless they have a professional designation, no lender will accept their appraisal for financing purposes. Home Inspector: the home inspector will advise the purchaser/homeowner in regard to the condition of the home and advise regarding issues surrounding its condition. The condition of the home naturally affects the market value of the property. Mortgage Default Insurer: provides default insurance policies to lenders typically offering high ratio mortgages, although default insurance can be provided on a mortgage loan of any LTV. The main insurers in Ontario include the government insurer, the Canada Mortgage and Housing Corporation (CMHC), and two private insurers, Sagen and Canada Guaranty Mortgage Insurance Company (Canada Guaranty). Typically, the lender will pass off this premium to the borrower. Land Surveyor: A licensed Ontario Land Surveyor (OLS) is a person who creates a specialized map, referred to as a survey, which is a legal document, of a parcel of land that details boundary locations, building locations, physical features, and other important items. Lawyer: they perform the following tasks in a mortgage transaction: -negotiating and drafting the Agreements of Purchase and Sale -acting for buyers and sellers on new or re-sale home, condo, or commercial purchases or sales -acting for borrowers or lenders on mortgage transactions, including preparing documents and registering documents. Mortgage Credit Insurer: is an insurer that provides a policy to the borrower so that upon a claim (in the case of death; there are additional creditor insurance policies), the mortgage loan is paid by a one-time lump sum payment to the lender. Title Insurer: is an insurer that provides a policy which provides coverage for the insured’s title. It can compensate the insured for real losses associated with covered issues found in the terms of the policy. For example, if there was an old mortgage on title that was never discharged and this prevents the property from being conveyed to the purchasers, the titles insurance policy will take steps to remedy this situation. It also assists in streamlining the closing process (the lawyer closing the transaction), protects against fraud and forgery, and is available on purchases, refinances, and to homeowners who did not obtain a title insurance policy on either of those transactions. Mortgage Administrator: is a person or entity that services a mortgage loan on behalf of another. For example, an administrator may process payments, renewals, and discharges, provide correspondence and act to collect the mortgage arrears for a lender that has contracted them. Under the MBLAA, mortgage administrators are licensed in Ontario. Regulation 406/07 of this legislation defines a mortgage administrator as one who is ‘taking steps, on behalf of another person/entity, to enforce payment by a borrower under a mortgage.” Chapter 2: Basic Mortgage Concepts 2.2 What is a Mortgage? The word mortgage is defined as “any charge on any property for securing money or money’s worth.” The more common definition is, “A mortgage is a loan secured by real property.” 2.3 What is a Collateral Mortgage? A collateral mortgage is usually used for secured lines of credit, is a charge that is typically registered for an amount higher than what is borrowed. The collateral mortgage allows for the ‘re-advancing’ of principal as the borrower pays down their mortgage or if their property value increases. In addition, CM allow lenders to lend more money to borrowers, based on qualifications, after closing, without registering a new mortgage (since the original mortgage is registered at a higher amount than was originally advanced). Most chartered banks will not allows transfers of collateral mortgages from other chartered banks. See page 36 for details. Pros: Refinancing – if the borrower wishes to borrow more money, the lender does not have to discharge the current charge (the security) and register a new one. Cons: Additional Financing – the borrower will not be able to obtain a 2nd mortgage due to the fact that they pledged the total property as collateral for the original mortgage. Switches/Transfers: a switch/transfer is more costly to another lender due to the need to discharge the original mortgage. 2.4 The Purpose of Using a Mortgage Mortgages can be used for several purposes: 1: Purchase: the primary use of mortgages is to assist borrowers with their property purchases. Pre-Approval: borrowers can determine how much they qualify to receive before actually buying a property. It is guaranteed for the next 45-120 days (depending on the lender) that the pre-approval will be honored. However, it is not a guaranteed approval, as the borrower is not yet required to prove their income, downpayment, etc. One they decide on a property to purchase, they will submit their full application. Pre-Qualification: will use the borrower’s income, the lender’s interest rate and amortization, but does not include their credit. Do not use pre-qualification for making an offer on a property, a pre-approval is the better option. 2: Refinance: if a borrower already has an existing property, they may wish to refinance the property (with a different lender) which typically requires them to pay a pre-payment penalty, unless the mortgage is fully open. 3: Equity take-outs (ETO): a ETO is when a borrower increases the size of their mortgage or takes out a 2nd mortgage or another debt against the property, such as a LOC. Most often, an ETO is used to consolidate other debt, like credit cards, but equity can be taken out for other reasons such as to purchase another property or other goods (like vehicles). 4: Bridge Financing (Interim Financing): is used when a person is selling their current home and buying a new one. The issue requiring this type of financing is when the buyer is in the process of closing on another property before the sale of their existing property. Bridge financing solves this issue by providing the funds necessary for the downpayment for the 2nd property by taking a 2nd mortgage (secure by the existing property), placed on the home waiting to be sold. 5: Construction (Draw or Builder’s Mortgage): is used for the construction of a new home. The difference between a standard mortgage and the builder’s mortgage is that the Draw is typically released in stages (referred to as ‘draws’). Typically 5 draws: 1st (Land): 15% of proceeds are received once the land is excavated and the funds are used to pay for the land + build the structure of the home. 2nd (Structure + Roof): 25% will be received once the roof is built and enough of the structure has been completed to ensure it is watertight (the project is considered 40% complete). 3rd (Utilities): 25% will be released once the plumbing/electrical, heating, and drywall are in place. 65% complete. 4th (Fixtures): 20% will be released once the fixtures/cabinets are installed for areas like the bathroom, bedroom, and kitchen. 85% complete. 5th (Complete): Final 15% released once the building is considered fully complete. All interior/exterior work is finished, including landscaping and driveway. Government of Canada Support: The government has a few programs: 1: First-Time Home Buyer’s Incentive: this program is a shared equity mortgage, meaning the government shares in the upside and the downside of the property value. It allows the eligible purchaser to borrow 5-10% of the purchase price of a home. The purchaser pays back the same amount upon sale of the property, within a 25-year window. See page 38 for examples. 2: Home Buyer’s Program (HBP): The Canada Revenue Agency (CRA) has a program entitled the HBP that allows first time home buyers to use up to $35k of their RRSP’s as a downpayment without paying tax on the withdrawal. The amount removed must be repaid within 15 years. With a spouse or partner can withdraw up to $70k. CRA defines a first-time homebuyer as an individual who has not owned a home that they occupied as a principal place of residence during the period beginning January 1st of the fourth year before the year of withdrawal and ending 31 days before the withdrawal. 3: Home Buyer’s Amount (AKA Home Buyer’s Tax Credit): Enacted in 2009, this federal program provides a non-refundable tax credit, based on an amount of $5k. 4: GST/HST New Housing Rebate: a purchaser may qualify for a rebate of part of the GST/HST that they paid on the purchase price or cost of building their new house, on the cost of substantially renovating or building a major addition onto their existing home or on converting a non-residential property into a house. 5: Canada Greener Homes: eligible homeowners across the country improve the energy efficiency of their home and reduce their bills, and they will receive $5,600 to make energy-efficient retrofits to their homes. Government of Ontario Support for Homebuyers Land Transfer Tax Refund: When you buy land in Ontario, you pay land transfer tax. First-time homebuyers may be eligible for a refund of all or part of the tax. To claim a refund, you must be at least 18 years old, you cannot have owned a home or an interest in a home anywhere in the world, and your spouse cannot have owned a home or interest in a home, anywhere in the world while they were your spouse. City of Toronto Support Municipal Land Transfer Tax (MLTT) Rebate: The first-time home purchase rebate applies to: -newly constructed -resale residential properties It does NOT apply to: -commercial, industrial, or multi-residential properties The rebate is $4,475. See page 39 for the definition of a first-time buyer. 2.5 Financial Components of a Mortgage Face Value: is the face amount of the total loan that is registered against the property. Not necessarily what the borrower receives, but it is the amount for which the borrower is liable. Term: will indicate the time the contract will be in force. Once expired, the contract must either be paid in full or renewed with the current lender. Amortization: refers to the total number of years that it will take to fully repay the amount borrowed and requires a blended periodic payment of both interest and principal (except Interest Only and Interest Accruing Mortgages). Interest Rate: the amount of interest being charged on the mortgage. Can be fixed or variable, depending on the mortgage. See page 42 for example. Buying down an Interest Rate: many lenders allows the agent to ‘buy down’ the interest rate for their client, by foregoing a portion of their commission or accumulated points (some lenders offer points in addition to commission) to reduce the rate of interest being charged or a particular mortgage. See page 42 for sample calculation. Compounding Frequency: mortgage typically compound either annually or semi-annually. Payment Amount: the contract will lay out the amount of each payment during the term, based on the face value, interest rate, payment frequency, and amortization. See page 43 for a visual illustration of a mortgage. 2.6 Compound Interest See page 44 for details on how compounding interest works. 2.7 Interest and Principal Portions of Mortgage Payments See page 46 for a chart that shows the portion of the payment that is attributed to principal vs interest. 2.8 The Mortgage Contract Standard Charge Terms: is a standard document that is created by the lender and contains all the terms and conditions regarding borrowing and repaying money when real property is used as collateral. These are filed with the Office of the Director of Titles and given a number which may be referenced in a Charge document. More than 99% of all registrations in Ontario’s land registration system are made electronically under the Teraview electronic land registration system. Borrower Covenants When a borrower pledges their real property as security for their loan, they have several obligations: 1: Repay the Loan: the borrower agrees to repay the loan based on the payment schedule outlined in the contract. Failure to do so results in the borrower being in default. 2: Insure the Property: the borrower agrees to keep adequate property insurance to protect the lender from losing their security due to fire or other covered risks. If the borrower fails to keep adequate insurance, they will be considered in default. 3: Maintain the Property: agrees to keep the property in good, saleable condition including repairing anything that requires it. Failure to do so will result in the buyer being in default. 4: Not to Commit Waste: waste is a legal term that includes actions or conduct that could result in damage to the property or loss of property value. Committing waste will result in the lender considering the borrower to be in default. 5: Pay Property Taxes: the borrower is required to pay their taxes on time. If the borrower doesn’t, the lender may pay the taxes, and add them to the borrower’s mortgage/consider the borrower in default. This is because the Municipality can register a lien against the borrower’s property for unpaid taxes. This lien will take precedence over any other mortgage/lien registered against the property, reducing the lender’s security. 6: Follow the Terms of the Standard Change Terms: the borrower must abide by any other terms and conditions listed in the SCT. Lender Covenants: Lender’s typically have several covenants that borrower’s need to abide by: 1: Discharge of the Charge: once the mortgagee has received funds that are sufficient to completely repay the balance of the mortgage, the mortgagee is required to provide the mortgagor, the borrower, with proof that the amount borrowed has been repaid in full. The mortgagee does not have to register the discharge of charge on title, which means that the borrower is responsible for having this registered. If the mortgage is being refinanced by another lender, it is standard procedure for the new lender to have their Solicitor closing the mortgage register the discharge of charge before they register their new charge. 2: Assignment of the Mortgage: the mortgagor has the right to request that the mortgage assign the mortgage to a new lender as long as the mortgagor’s mortgage is in good standing and the mortgagor has the right to redeem the mortgage. See Mortgages Act, Part 1, and Section 2. 3: Provide Quiet Possession: is a legal term reflecting the right of the mortgagor to have possession of the property free from interference by the mortgagee, except when in default. 2.9 Mortgage Rights There are different ranks for mortgages. A first mortgage refers to the mortgage that was registered first. A mortgage registered after the first one, while the first is still active, is considered a 2nd mortgage. This process continues (third mortgage, etc). Typically, a lender will not advance a 2nd mortgage in excess of the first mortgage, or that exceeds a max percentage of the size of the first mortgage. Typically, the interest rate will increase with the risk of the mortgage. Subsidiary mortgages have higher interest rates (2 is higher than 1). 2.10 Conventional and High Ratio Mortgages See page 49 for details. High Ratio Mortgage: is a mortgage that exceeds 80% in LTV. This refers to a property that has less than 20% downpayment, or in a refinancing situation, less than 20% equity. If a mortgage is provided by a federally regulated bank, that bank must obtain mortgage default insurance on the loan (if it exceeds 80% LTV). This premium is typically added to the mortgage and will increase the payment. If the mortgage is not provided by a federally regulated bank, then this insurance is not required. Many lenders that do not use this insurance typically refer to themselves as ‘self-insured’. This simply means that the lender will typically charge a lender’s fee (referred to as a self-insured fee), typically similar in amount to a default insurer’s fee. The lender will typically use these fees to fund a reserve that can be used to offset any losses suffered by a borrower’s default. Conventional Mortgage: is one that is 80% LTV or less. Chapter 3: Mortgage Repayment Plans and Options 3.1 Types of Mortgage Repayment Plans There are 8 common types of repayment plans: 1: Partially Amortized, Blended Constant Payment Mortgage – Fixed Rate: the most common type of mortgage in Canada. Partially Amortized: the amortization refers to the time that it will take to repay the mortgage. Most common amortization period is 25 years. The term partially indicates that there is a term involved. If there wasn’t a term, it would be fully amortized, which is uncommon in Ontario today. Term: is the period of time in which the terms of the mortgage remain the same, typically between 6 months to 5 years (although longer terms are available). The mortgage contract is based on this term, and at the end of the term the mortgage contract comes up for renewal. Blended Payment: is a combination of principal and interest, allowing the borrower to pay the accumulated interest due for the payment period as well as an amount to pay down the principal amount of the loan outstanding. Constant Payment: means the payment does not change throughout the term. See page 56 for example. Fixed Rate: refers to the fact that the interest rate is fixed, and does not change over the entire term. Pros: Security – knowing the payment is constant allows the borrower to budget accordingly. Cons: Potential Lack of Savings: they may not save as much interest over time with a fixed term. 2: Partially Amortized, Blended Constant Payment Mortgage – Variable Rate: pretty much the same as #1 except the interest rate is variable (meaning it adjusts based on the prime lending rate of the lender). Pros: Savings – typically variable rate mortgages have lower interest rates than fixed. Ability to Switch to Fixed – most VM offer the ability to switch to a fixed rate product through the same lender without penalty. Cons: Interest Rate Uncertainty: can be risky if the lender increases rates. See page 59 for a sample variable rate clause. 3: Partially Amortized, Blended Variable Payment Mortgage – Fixed Rate: similar to #2, but the difference is that the payment will change each time as the lender’s prime rate changes. This is designed to minimize the risk to the lender of the borrower experiencing negative amortization. Pros: Savings – greatest possible savings (lowest interest rate). Maintain Amortization – regardless of the change in the interest rate the payment will fluctuate to match the change, thereby keeping the amortization the same. Cons: Interest Rate Uncertainty – if rates go up, payments also go up, so borrower’s need to account for this risk in their budgeting. Payment Fluctuation – as the payment fluctuates, the borrower must make sure they have enough funds to make the payments. See page 61 for a graphic illustrating the highest to lowest rates for different products. 4: Interest Only Mortgage: no amortization of principle, only interest payments. Pros: Increased Cash Flow – lower payment due to no principle. Increased Purchasing Power – can borrow more money due to the lower payment. Investments – in an investment property, the interest can be deducted as a cost of investing. Cons: No Principle Reduction – risk to the lender, if the borrower defaults, and the property doesn’t appreciate, their principal is at risk. Borrower risk, they can end up owing more than the property is worth in the same scenario. 5: Home Equity Line of Credit (HELOC): is a line of credit secured by real property. This money is available to a borrower, but not advanced at closing. Payments are only made on the outstanding balance of the LOC. Payments can be as small as interest only, or as large as the borrower desires. Pros: Flexibility – allows the borrower to access funds as necessary and make repayments that fits their budget. Cons: Interest Rate Uncertainty – A HELOC contains the same rate volatility as a variable rate mortgage. 6: Interest Accruing Mortgage: are loans that have no repayment of principal or interest during their life. At the end of the mortgage, the entire principal is repayable, including all accrued interest. Usually only for a term of 1 year, due to the lender’s risk. Pros: Cash Flow – since no payments, no impact to cash flow of borrower. Cons: Increasing Debt – since the balance accrues over time, the debt grows over the term of the mortgage. Reduced Equity – the rising debt eats at the equity remaining upon the end of the mortgage. 7: Reverse Mortgage: is a type of interest accruing mortgage typically provided to seniors. Providers in Ontario include HomeEquity Bank and Equitable Bank. See page 64 for details. Pros: Cash Flow – no payments = no cash flow impact. Repayment – since the balance isn’t due until the death of the homeowner, the balance doesn’t need to be repaid in the borrower’s lifetime. Cons: Reduced Equity – the accrued debt balance eats away at the remaining equity, which could become a problem if the homeowner wants to sell during their lifetime. 8: Vendor Take-back Mortgage: is a mortgage provided by a vendor to the purchaser of a property. The vendor is acting as a second mortgage lender, with a different lender providing the original mortgage. Pros for Vendor: Salability – increased ability to sell the property when there are not many qualified buyers. Investment – the vendor is engaging in a mortgage investment without having to invest cash, generally earning a higher rate of return than a typical investment. Deferred Capital Gains – there is the ability to spread the VTB equal to the gain over 5 years, possibly resulting in a lower tax bracket for each of those years. Cons to Vendor: Default Risk – possible that the borrower defaults, resulting in: 1: necessity to start collection proceedings, including a PoS, may require lawyer’s (and fees) resulting in a lower return for the lender. 2: Loss of part or all of the investment Pros to Purchaser: No Down Payment – the ability to purchase with a little or no down payment. Higher Purchasing Power – ability to purchase a property even if the purchaser may not be qualified to borrow the additional funds from another lender or institution. 3.2 Mortgage Features and Options These features can be broken down into categories: 1: Prepayment Options Fully Open: allows the borrower to repay the mortgage, in whole or part, at any time without a penalty or notice. Pros: Flexibility – the mortgage can be repaid at any time, allowing for flexibility. No Penalties – no penalty for pre-payment. Cons: Higher Rate – most fully open mortgages have a higher rate. Partially Open: allows the borrower to repay the mortgage in whole with a penalty of either 3 months interest or the interest rate differential. Pros: Flexibility – mortgage can be repaid at any time. Cons: Higher Rate – typically a higher rate than a closed mortgage. Penalties – offers the flexibility to prepay the mortgage at any time, but has to pay a penalty. Closed: only applies to the sale of a property. The main feature is that in a closed mortgage, the borrower does not have the option to pre-pay the remaining balance before the end of the term, except by sale of the property. Normally must be an ‘arm’s length sale’, meaning the borrower could not sell the property to a family member simply to prepay the mortgage. Pros: Rate – since this provides the lender with significant security, they often offer a lower rate. Cons: - Lack of Flexibility – no option to pre-pay lowers the flexibility for a borrower. 2: Prepayment Penalties 3 month’s Interest: charges a borrower three times an average amount of monthly interest, typically calculated by multiplying the outstanding balance by the interest rate, divided by four. See page 68 for example. Interest Rate Differential: is the difference between a borrower’s current contracted mortgage rate and the lender’s current available rate for a similar term. This difference is then multiplied to the outstanding balance and the amount of time remaining in the term to determine the exact dollar amount. Typically, applicable when the current mortgage rate is higher than the current lender’s comparable rate. See page 69 for example. 3: Repayment Options Periodic Payment Increases: allows the borrower to increase their payment, in many cases up to 100% of the original payment amount, during the term of the mortgage. Most lender will allow the borrower to lower their payment to an amount no less than the original payment amount if they find the increased payment is no longer affordable. Pros: Savings – increased savings over time (see chart on page 71) Cons: Cash Flow – higher payments lead to higher cash flow burdens on the borrower. Accelerated Mortgage Payment: is an option that provides for an increased periodic mortgage payment. This can be compared to the periodic payment increase; however, this option allows the borrower to increase their mortgage payment before the first payment begins, whereas the periodic increase is required to be requested once the mortgage has been advanced. Note: changing the payment frequency is not what accelerates the mortgage. Changing the amount of the payment does accelerate the mortgage. See page 71 for example. Pros: Savings – can save tens of thousands of dollars over time. Cons: Cash Flow – an increased payment amount puts strain on the borrower’s cash flow. Lump Sum Payment: allows the borrower to make a lump sum payment which is applied directly to the principal amount of the mortgage. The effect of the lump payment is more significant (in terms of savings potential) the earlier it is made. See page 74 for example. Extended or Shortened Amortization: allows the borrower to amortize the mortgage beyond the standard 25 years (ex: 30 years). By extending the amortization, this allows the borrower to either borrow more funds or have a reduced payment. See page 75 for details. Shortened Amortization: the opposite of extending, by decreasing the years of the amortization the payment either gets larger or the borrower can borrow less funds. This reduces the total amount of interest paid. 4: Cash Back Option: the borrower receives a sum of cash at the closing, typically between 1-7% of the total mortgage amount. Pros: Cash on Closing – borrower receives funds. Cons: - Higher Rate – most cash back options carry a higher interest rate. Repayment of the Cash Back – if the borrower decides to refinance with another lender, they will have to repay the cash back. See page 76 for example. 5: Combined/Bundle Option: is one that includes a standard mortgage along with another type of debt, such as a LOC. Pros: Flexibility – allows the borrower to have access to the equity of their property at any time by way of the LOC, without having to borrow additional funds. Cons: Registered Debt – The full amount is always registered against the title of the property. Since the additional funds are a LOC, the amount does not reduce over the term (as it’s a revolving credit line) and must be repaid at the end of the mortgage. See page 78 for example. 6: Portability Option: allows the current homeowner to take their current mortgage to their new home (AKA port). See page 78 for details. Default Insurance on Ported Mortgages If the mortgage is ported within the first two years of obtaining the mortgage, they would be eligible for premium credit from the mortgage default insurer. After two years, the full mortgage premium would apply. Blending Interest Rates: when porting a mortgage and the borrower requires additional funding, the lender will ‘blend’ the two debts and lend the additional debt at the market rate. See page 79 for details. Pros: Rate Protection – can keep their existing rate if it is lower than the market rate, saving money on interest. Cons: Limited Application – only really works when market rates are higher than current mortgage rates for borrowers (otherwise no delta to exploit). 7: Assumable Option: allows a purchaser to assume or take over the current homeowner’s debt on the property. The purchaser must be approved by the lender to assume the mortgage. See page 79 for the 3 options that a purchaser has. Pros: Lower Rate – the assumed mortgage interest rate may be cheaper than current market rates. Cons: Limited Application – only works when market rates are above current mortgage rates. Chapter 4: Property Ownership in Ontario 4.1 Real Property Property can be classified in 2 distinct ways: personal and real. Real Property can be defined as the land, and everything affixed to it. It is in a fixed location and is permanent, remaining, to one extent or another, long after the current owners have relinquished their rights to it. Personal Property can be defined as everything that is not real property. That includes chattels and other goods. PP is typically not fixed in its location and normally has a shorter useful life expectancy than real property. 4.3 Estates in Land Fee Simple Estate: is the most common form of ownership in Ontario and provides the holder with the widest breadth of rights available. Fee refers to the fact that the estate may be inherited while simple refers to the fact that there are no prohibitions against who may inherit it. The owner of this estate is in control of the real property for as long as they have it, subject to paying the property taxes and other municipal obligations and subject to any interests in the property that may be registered against the property’s title. The individual may transfer their interest in the property during their lifetime or dictate who will inherit the fee simple interest upon their death. They may also mortgage the interest, pledge it as security for a loan (like a secured line of credit), and so on. If the fee simple owner dies without a will (and there are no heirs), the interest is terminated, and the property will escheat or revert back to the Crown. Leasehold Estate: AKA a lease, is an interest in land created by a landlord and tenant, most commonly by a lease. This interest in land is credited for a fixed period of time (like a month, a year, etc). No limit to the length of a lease. A leasehold estate provides the owner with the right to exclusive use and possession of the property, subject to contractual limits. Life Estate / Life Lease Is defined as the right to use or occupy real property for the duration of one’s life. At the end of the term (the life of the owner), the fee simple ownership goes to the ‘remainderman’. A remainderman is an individual who is on the deed as the next in line to own the property. See page 88 for examples. 4.4 Property Taxes Types of Properties 6 Types: 1: Detached 2: Semi-detached 3: Row-townhouses 4: Condominium Unit 5: Duplex, triplex, fourplex 6: Co-Operative (Co-op): Condominium Ownership Are considered more complex than other forms of property ownership. A condominium (also know as a strata lot) is an individual unit within the building, that combines fee simple ownership of the unit, including all it’s rights, with a combined ownership of common areas, referred to as common elements. Each unit pays a monthly maintenance fee to the condominium corporation. The condominium corporation is managed by a Board of Directors, which consists of unit owners who are elected by the other unit owners on a regular basis. Condominium Types 1: Freehold Condominiums -standard condo corps: includes fee simple ownership + an interest in the common elements (a unit cannot be separated from the interest in common elements). Most common types are condos and row-townhouses. -vacant land condo corps: only has common elements that benefit the properties in the neighborhood (ex: a golf course, ski hill). These owners enjoy the common elements and jointly fund the maintenance and repair through common expense payments. -common elements condo corps: resembles a traditional sub-division. Requires at least one unit to be vacant when the corp is registered. No multi-dwelling permitted. The unit owners maintains/repairs their unit, while the corp manages the common elements (like sewers, roadways, water systems, etc). -phased in condo corps: built in phases by the developer. Units may be sold once the Declaration and Description have been registered. 2: Leasehold Condo Corps The land is not owned by the condo corporation. Lease purchasers buy a leasehold interest in common elements and units, but they do not own the land. The Condominium Act treats leasehold communities much like freehold condos. Key differences include: -a common expense fee that includes the percentage of rent payable to the landowner -once the ground lease expires, the owner’s right to occupy the unit is automatically terminated A portion of the rent payable to the landowner is included in the common expenses fee, but the cost of land isn’t included in the price of the condo. The lease term is required to be between 40-99 years. Has the option to sell, transfer, mortgage, and other actions with your unit without asking permission from the landowner. Once the ground lease expires, the owner’s right to occupy the unit is automatically terminated. Registering a Condo Registration refers to the formal creation of the condo corp. Once approved, the condo’s Declaration and Description are ultimately registered in the land titles office, following their approval by the requisite governmental authorities. Takes 2-5 months. Condo Forms See page 91 for details. 4.5 Sub-divisions See page 92 for details. 4.6 Surveys What is a Survey? A surveyor’s Real Property Report (survey), is a legal document that clearly illustrates the location of all visible public and private improvements relative to property boundaries. No central depository for surveys. See page 93 for more details. 4.8 Encumbrances Is an interest in a property that has the effect of limiting the rights of fee simple ownership of real property. Typical encumbrances are mortgages, easements, and restrictive covenants. Easement: are rights acquired for the benefit of real property, granting rights to use another property. The land giving the right is called the servient tenement, while the land receiving the right is called the dominant tenement, where the term tenement refers to real property. An easement is an interest in land that passes from one owner to another, or “runs with the land”. An easement cannot be extinguished by the owner of the servient tenement. Both the owner of the dominant and servient tenement must agree to remove the easement. See page 99 for example. Restrictive Covenant Is a restriction of use placed on title of the servient tenement for the benefit of the dominant tenement. As with an easement, the RC runs with the land and can only be extinguished by the agreement of both dominant/servient tenements. See page 99 for example. 4.9 Co-Ownership of Real Property Property can be owned by an individual or several individuals, referred to as co-ownership. Two types: tenancy-in-common and joint tenancy. Tenancy in Common: is a type of co-ownership of real property typically used by parties who wish to own individual shares in a property. If one party decides to sell their interest, the other party would become the new tenant in common. See page 100 for more details. Joint Tenancy: is a type of co-ownership typically used by spouses purchasing a matrimonial home. Unlike a tenancy in common, joint tenants own an undivided interest in the property. Both joint tenants own 100% of the property. If one co-owner dies, the property then becomes the surviving owner’s property without having to go through the probate process. Some parents will add a child or children on title as joint tenants so that, on the death of the surviving parent, the property becomes the child’s without having to pay the costs of probate. However, there may become tax implications involved in the process, since when the property other than a principal residence is transferred to a non-spouse, a disposition is deemed to occur at fair market value. The result is any accrued gain is taxable in the year of disposition which may result in tax payable that exceeds the amount that would have been payable in probate fees. 4.11 Loan Security: Registration and Discharge The Charge/Mortgage The Charge/Mortgage is the instrument that is used to register the debt or loan against the borrower’s property. It forms the lender’s security for the debt. See page 103 for examples/case studies. Collateral Charge/Mortgage See page 105 for example. The Discharge of the Charge/Mortgage See page 107 for example. Blanket Mortgages Sometimes multiple properties are used as collateral for mortgage loans. For example, if a borrower has equity in 2 properties, but not enough in either individually to qualify (but collectively there is enough equity) then the lender can use both properties as collateral, placing a ‘blanket’ over both. See page 108 for example. Partial Discharge A partial discharge is when a lender releases a property being used as security for the loan. See page 109 for examples. 4.12 Judgements, Writs of Seizure and Sale of Land, and Liens Judgements: a judgement is a judge’s decision that a debt is owned by a debtor to a creditor. In Ontario, a creditor can, after obtaining a judgement, file a Writ of Seizure and Sale of land against a debtor in any county or district in which the debtor owns land. The writ will encumber any currently owned land in any county or district, or land which is purchased in the future by the debtor, by way of placing a lien against the property. It should be noted that even though the creditor has obtained a judgement, they do not have to file a Writ of Seizure and Sale and can wait until they know the debtor owns land. What is a Writ of Seizure and Sale? If you wish to enforce a writ in different districts/counties, you must apply for the same Writ each time for each location and file it there. In addition, if another creditor has a writ filed in the same enforcement office, both parties will share, on a pro-rata basis, any money paid to the enforcement office from any enforcement activity against the debtor. Note that the enforcement officer has the duty to act reasonably and in good faith towards all parties. Does the creditor have to wait for the debtor to decide to sell the land? A: No. 4 months after filing the writ with the enforcement office, you can direct them to seize the land and sell it, but the actual sale cannot proceed until the writ has been on file for 6 months. Note: the enforcement office can only sell the portion of the land that the debtor actually owns. Mortgages, liens, and encumbrances may reduce the value of the property that is available to be seized and sold by the enforcement office. Creditors should determine, before proceeding with this process that the debtor actually has equity available to be sold. How long does the writ last? The writ will expire after 6 years from the date it is issued, unless you renew it for an additional six-year period. A writ may be renewed before it expires by filing a Request to Renew a Writ for Seizure and Sale (From 20N) with the enforcement office. Each renewal is valid for 6 years from the previous expiry date. There is a fee to renew. Liens A lien is a security against a property, either real or personal, for a debt. Legislation allows for the placing of a lien on a property for construction costs not paid, which is commonly referred to as a ‘mechanics lien’. Under the Personal Property Security Act (AKA PPSA), a lien can be registered against personal property such as for a car loan. A lien does not force the sale of a property, it simply uses that property as security for a debt. Chapter 5: Licensing The Mortgage Brokers Act, dating back to the late ‘60s, was not substantially updated for 30 years. Before this, the Real Estate and Business Brokers Act (REBBA), regulated mortgage brokers. Since June 8, 2019 the Financial Services Regulatory Authority of Ontario (FSRA) is the governing body responsible for overseeing the mortgage brokerage industry. 5.1 Activities requiring a License The MBLAA regulates the following activities: -dealing in mortgages in Ontario -trading in mortgages in Ontario -carrying on business as a lender in Ontario -carrying on business in the administration of mortgages in Ontario Regulated activities are outlined in section 2 & 6 of the MBLAA. Dealing in Mortgages Criteria to be considered dealing in mortgages in Ontario: 1: Soliciting another person or entity to borrow or lend money on the security of real property. 2: Providing information about a prospective borrower to a prospective lender, whether or not the Act governs the lender. 3: Assessing a prospective borrower on behalf of a prospective mortgage lender, whether or not the Act governs the lender. 4: Negotiating or arranging a mortgage on behalf of another person/entity or attempting to do so. Trading in Mortgages Criteria to be considered trading in mortgages in Ontario: 1: Soliciting another person or entity to buy, sell, or exchange mortgages. 2: Buying, selling, or exchanging a mortgage on behalf of another person/entity. 3: Buying, selling, or exchanging a mortgage by a person/entity on their own behalf. Lending The MBLAA states that ‘a person or entity is a mortgage lender in Ontario when he, she, or it lends money in Ontario on the security of real property or holds themselves out to doing so.’ The person/business must be licensed as a mortgage brokerage, or must be exempt (like being licensed under different legislation such as the Bank Act or the Trust and Loan Companies Act, or if the person’s or business’s lending activities are done solely through a mortgage brokerage or other regulated lender.) Several changes were made to the Financial Services Commission of Ontario Act, 1997 as well as the License Appeal Act, 1999 to reflect changes to legislation, resulting in the MBLAA. Paragraph 5 of subsection 35.2 of the Securities Act is important, which states: “Subject to the regulations, registration is not required to trade in the following securities: Mortgages or other encumbrances upon real or personal property, other than mortgages or other encumbrances contained in or secured by a bond, debenture, or similar obligation or in a trust deed or other instrument to secure bonds or debentures or similar obligations, if such mortgages or other encumbrances are offered for sale by a person or company licensed, or exempted from the requirement to have a license, under the Mortgage Brokerages, Lenders, and Administrators Act, 2006.” 5.2 Licensure Four Licenses 1: Mortgage Brokerage License 2: Mortgage Broker’s License 3: Mortgage Agent’s License 4: Mortgage Administrators License The MBLAA states that to enforce compensation for any of its licensed activities, the person or business must be licensed. If not licensed, the lender could refuse payment to the agent and the agent would have no legal basis to sue for damages. Restrictions The MBLAA restricts the use of the titles, ‘mortgage brokerage’, ‘mortgage broker’, mortgage agent’, ‘mortgage administrator’ for persons and entities that are appropriately licensed. Exemptions to Licensure Regulation 407/07 details examples where certain people or entities are exempt from obtaining a license under the MBLAA. These are: 1: Simple Referral: (section 1-2 of the Regulation) a basic referral does not require a license to receive compensation. Ex: a realtor referring a client to a broker. 2: Lawyer: (section 3-5) lawyers are exempt from prescribed activities if they are acting solely on behalf of their client and is not holding him or herself out to be trading, dealing, or administering mortgages to the general public. Ex: a divorce lawyer arranging for financing for the client who requires a mortgage to pay their settlement. 3: Lender: (section 15 on Mortgage Lending) if a person/entity only lends through a mortgage brokerage or other person/entity, they are not required to have a mortgage brokerage license. 4: Vendor Take back: registered real estate brokerages, agents, or brokers are exempt if they arrange for their client’s a vendor take-back mortgage, provided that they aren’t holding themselves out to the public as dealing in mortgages. 5: Securities Act: (section 12-14) a person or entity registered under the Securities Act is exempt, provided that they aren’t holding themselves out to the public as dealing in mortgages. 6: Other Exemptions: includes trustees in a bankruptcy, those acting under court order, statutory corporations, a personal corporation of a broker or agent, motor vehicle dealership financing companies, directors and employees of Crown agencies or other exempted persons/entities. As per section 11 of Regulation 407/07 consumer reporting agencies are exempt if they are providing information on prospective borrowers to lenders and are not otherwise dealing in mortgages. 7: Mortgage Administrators: a person or entity is not required to have a mortgage administrator’s license if they administering mortgages on behalf of the Crown, a financial institution, a collection-agency registered under the Collection Agencies Act, or if they are only administering mortgages that constitute mortgage-backed securities as per sections 16-19, Exemptions for Administering Mortgages. Having a License Issued by FSRA FSRA is empowered to: 1: issue or refuse a license 2: impose or amend conditions on a license 3: renew or refuse to renew a license FSRA Public Registry See page 120 for details on FSRA public registry. Note: the information on the register must be kept until two years after the expiry date of the individual’s license or if the license was surrendered or revoked before the expiry date, until two years after the date on which the license would have expired if it had not been surrendered or revoked. 5.6 The Mortgage Agent’s License Regulation 409/07 deals with who is suitable to be licensed. Licenses expire annually and are re-issued annually at the fixed date (ex: every March 31st). To become a licensed mortgage agent you must: -be at least 18 years old -be a resident of Canada -have a mailing address in Ontario that is not a post office box and that is suitable to permit services by registered mail -be authorized by a brokerage to deal or trade in mortgages on its behalf -have successfully completed an approved education program for mortgage agents within 2 years before they apply for the license. An agent will be deemed unsuitable for a license if: -the individual’s past conduct affords reasonable grounds for belief that they will not deal or trade in mortgages in accordance with the law and with integrity and honesty -the individual is carrying on activities that contravene or will contravene the MBLAA or its Regulations -the individual has made false statements in their application for a license See page 126 for details regarding when the agent should seek advice from the principal broker 5.7 The Principal Broker See page 127 for details regarding the principal broker (their responsibilities, and their authorization). 5.8 The Compliance Checklist See page 128 for the checklist. 5.10 FSRA’s Monitoring and Enforcement Steps in the process: 1: Monitoring, checks, reviews, audits 2: Investigations 3: Enforcement See page 132 for details. Prohibited Activities The MBLAA (sections 43-50) clearly lays out what are considered to be prohibited activities under the legislation: -counselling or advising anyone to give false or deceptive information in a transaction -obstructing FSRA from performing its duties or withholding anything relevant to an inquiry -providing false or misleading information to FSRA -a person or business taking adverse employment action against an employee because the employee provided information or documents to FSRA Penalty Types The MBLAA (sections 43-50) gives FSRA two types of tools: 1: Administrative Penalties: (regulation 192/08) are either ‘general’ or ‘summary’ and are covered in detail in section 1-6 of the Regulation. The same timeframe applies to both. FSRA may impose administrative penalties for contraventions of or failures to comply with the MBLAA in amounts determined in accordance with the Regulations. If FSRA imposes an administrative penalty, the affected party may request a hearing before the Financial Services Tribunal. Admin Penalties: 1: Mortgage Brokerage/Administrator: up to a max of $500k 2: Broker/agent: up to a maximum of $100k 3: Anyone else not licensed: up to a max of $500k. If FSRA proposes to impose an administrative penalty, the licensee has the right to appeal this decision to the Tribunal within 15 days of receiving it. If the penalty is not paid, it is considered a debt to the Crown and can be enforced as such. Those assessed with a penalty must pay it with 30 days of being assessed the penalty or once a hearing has been conducted, or longer if provided for in the penalty or order made from the hearing. See page 134 for more details + Charges for Offense under the Legislation 2: Charges for an offense under the legislation: As of Feb 2022, there are two types of penalties that may be imposed: 1: Individuals, a fine up to $500k and imprisonment for up to one year, or both 2: Corporations, a fine up to $1M. Having a License Revoked or Suspended by FSRA See page 135 for details. 5.11 Mortgage Broker Regulators’ Council of Canada (MBRCC) Code of Conduct 1: Compliance/Outcomes 2: Accountability 3: Honesty 4: Competence 5: Suitability 6: Disclosure 7: Management of Conflicts of Interest 8: Security and Confidentiality 9: Stewardship 10: Co-operation with Regulators See page 136 for details.