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Umbrella Mortgages: Providing a Framework that Protects Citizens

By : Chambre des notaires du Québec

Buying a property is one of the most important investment a person will make in their lifetime. According to the Living in Canada website, average house prices are $1,092,000 in Vancouver, $766,000 in Toronto and $341,000 in Montreal. Consequently, Canadians usually have to take out a mortgage to purchase a property.

Financial institutions are increasingly offering their customers “umbrella” mortgages, which are a type of financing that can go up to the full value of the property and beyond. The collateral (i.e. the home) covers the homeowner’s current and future debts with the same lender (credit cards, line of credit, auto loan, personal loans, etc.).

Advantages of an umbrella mortgage

Umbrella financing offers important advantages. The interest rate is generally more attractive than that of an unsecured loan and the funds are more accessible. In addition, the amount recorded in the Land Registry of an umbrella mortgage is often higher than the purchase cost of the property. This makes it possible for the consumer to obtain additional funding without having to register another mortgage act on the property and paying discharge and legal fees.

Having said this, what happens when the consumer does not have full knowledge of the facts? Could this result in a debt situation that will undermine the consumer’s financial health? This may very well be the case, considering the fact that Canadian households already have a debt of almost $1.78 for every $1.00 of disposable income. According to the newspaper The Globe and Mail, 31% of Canadians do not have enough money to support themselves and 46% are $200 away from insolvency every month.

This question raises another. Do consumers understand the consequences of an umbrella mortgage?

A product misunderstood by consumers

A research study carried out in 2012 by Option consommateurs seems to indicate that this may not be the case. The research demonstrated that a majority of the respondents, who had subscribed to an umbrella mortgage in the previous 12 months, admitted that they had not paid close attention to the details of their contract and did not fully understand the terms of their agreement.

In addition, the study showed that the terms of an umbrella mortgage could be confusing for consumers. It was only once they were at their notary’s office that they obtained a full disclosure of their mortgage product, and by then it was too late to renegotiate the terms of the agreement.

Refinancing and mortgage transfer

Consumers subscribing to an umbrella mortgage will see certain problems occur when the time comes for a mortgage refinancing or when they apply for any other type of credit with another lender.

Because the value of the mortgage recorded in the Land Registry is often higher than the purchase cost of the property, it is likely that the person’s credit and borrowing capacity will be greatly reduced. Furthermore, according to the magazine Conseiller, it will be difficult for consumers to transfer their umbrella mortgage to another financial institution should they wish to take advantage of a preferential rate elsewhere, because the bank would also have to cover the risks related to their other debts. For this reason, few lenders agree to the transfer of an umbrella loan.

What happens at the time of sale?

When you subscribe to an umbrella mortgage, you should know that you will not be able to obtain a mortgage discharge as long as all the debts guaranteed by this loan are not paid for in full.

In the case of a joint loan, a second issue may appear at the time of sale of the property. In fact, according to the study conducted by Option consommateurs, consumers who have subscribed to a joint umbrella mortgage can only obtain a discharge if the debts of both co-owners with the same lender are paid in full. It is also possible for the mortgage to guarantee the debts of a co-owner without the other being notified.

To illustrate this, let us take the example of Tracy and Spencer, who have decided to separate and sell their home after living together for two years.

Their bank has refused to release them because the amount of the sale is not enough to cover their debts, despite the fact that they received an offer of $300,000, whereas the initial loan was only $280,000. Unbeknownst to Tracy, Spencer contracted a new loan with their bank for a car. To this amount were added penalty fees for breaking the mortgage contract.

Because the bank refuses to release them, Tracy could be forced to remain co-owner with Spencer until the debt is paid. If there is a payment default on the part of Spencer, the bank could seize Tracy’s property even though the debt incurred was for goods that do not belong to her.

Finally, if Tracy and Spencer do not pay the debt soon, they may risk losing the sale of the property because few buyers will be interested in a house with a remaining mortgage.

The Chambre des notaires’ recommendations

Before you sign a mortgage contract, please make sure that you read and understand the terms that are offered. If you have doubts, a consultation with an impartial legal counsel can be beneficial.

Once the contract is signed, you must remember that current and future debts can only be secured by your property if you contract them with the same lender. If you do not wish your house to be used as collateral for all your debts, you should consider doing business with other financial institutions for your credit needs.

Beyond these recommendations, the Chambre des Notaires considers that measures must be taken to protect citizens who choose this type of financing.

A mortgage guarantee should not automatically extend to new obligations without the consumer consenting to them explicitly when they contract the loans. In addition, measures should be put in place to better inform citizens of their rights and obligations. Quebec residents who wish to have a better understanding of their contracts should retain the services of a notary before signing the legal documents.

By taking the necessary actions, the Legislator can offer a framework that will protect Canadian consumers and help counter the over-indebtedness of those who choose this type of guarantee.