What are the covenants and obligations you must fulfill?
A mortgage is just like any other legally-binding contract. When a home buyer and a lender sign the papers it’s expected that both parties will fulfil their covenants or obligations.
The documents can be complicated and difficult to grasp as a first-time home buyer. However, it’s important for you to understand your mortgage contract because there are significant consequences if you fail to meet the agreement. Read all of the information and ask questions if you don’t understand something. You may also wish to seek legal advice before signing a mortgage agreement.
If you used a mortgage broker/agent to find your mortgage loan, they are required to disclose to you the material risks of your mortgage in writing and in plain language. You are also allowed to have at least two business days to review a mortgage disclosure statement before you sign a mortgage agreement with a mortgage broker or agent, or sign a mortgage instrument, whichever is earlier.
Mortgage contracts can have different clauses based on the borrower-lender relationship, but they all have the same core promises.
Borrower CovenantsMortgage lenders have an interest in the property a home buyer is purchasing or refinancing. They want to ensure it is a sound investment in the event a home owner can’t pay back the mortgage in full. Borrower covenants are set so the lender can take action if the home owner is reckless with the status of their home.
The four financial obligations of borrowers are to:
- Repay the loan amount;
- Pay the property taxes;
- Pay the property insurance; and
- Maintain the property.
Mortgage Lender Covenants
Mortgage lender covenants protect the borrower and ensure their mortgage agreement is in good faith. If a borrower meets their obligations, a mortgage lender must:
- Discharge the mortgage once the borrower has paid it in full; and
- Leave the borrower in quiet possession of the property and not interfere with their use or enjoyment of the mortgaged property.
Being pre-approved for a mortgage isn’t the same as a mortgage contract. Pre-approval signals that the lender is interested in giving a home buyer money after a high-level assessment. They could choose to assess them and the property further before offering the actual contract.
Breaking the contract
Not all mortgages are the same and come with different penalties and fees for breaking the contract. Lenders must provide a home buyer a list of these penalties and how the accompanying fees are calculated. It’s important to understand these penalties
before agreeing to the contract.
Some of the common fees a home owner may be charged are:
- Pre-payment: if a home owner pays more than the scheduled amount or pays off the entire mortgage ahead of schedule
- Early exit: if a home owner leaves a mortgage before the term has finished
- Services: some are included in the contract, but others might come at an additional cost
- Administration and discharge: if a home owner exits and renews their mortgage with a different lender or pays off the existing mortgage
- Late payment: if a home owner is late making a scheduled payment
- Portable mortgage: if a home owner moves to a new home and keeps their same mortgage contract
- Change in use: if a home owner changes how their property is used (e.g. residential to business)
A lender will also lay out the enforcement actions available if the home buyer does not maintain the borrower covenant. The most serious enforcement action a lender can take against a home owner is a foreclosure or a power of sale. This happens when the home owner can no longer make mortgage payments. The lender will sell the home for fair market value to recuperate their investment.
RenewalThe contract agreement with a lender often lasts less than the entire length of a mortgage (one, three or five years). At the end of the term, home owners will need to renew their mortgage. It isn’t guaranteed that a lender will automatically renew the contract and could change the conditions, including interest rate and term. A mortgage broker can help home owners negotiate new terms or take their mortgage elsewhere when it is time to renew the mortgage.