A mortgage contract is a legally binding contract. When you and a lender sign the mortgage documents, you agree to the risks and the responsibilities outlined in the contract. These documents can be complicated. It’s important for you to understand your mortgage contract because there are significant consequences if you fail to meet the terms of the contract.
To help, here are some tips to help you understand what to expect in the process and some explanations about the covenants or obligations outlined in the mortgage contract you sign.
Always read your contract
Read all of the information provided. When you don’t understand a concept or a clause, be sure to ask questions. You may also wish to seek legal advice before signing a mortgage contract.
Know what you are signing
Before receiving the full mortgage contract, you will receive a letter of commitment (also known as an approval letter). It signifies that financing has been officially approved and represents a formal, binding contract between you and the lender once signed. This letter outlines the terms and conditions of the loan. It serves as the contract that initiates an official loan borrowing process.
Preapproval vs. Mortgage contract
When a lender preapproves you for a mortgage, it is not a guarantee that they will enter into a mortgage contract with you. A preapproval means the lender is interested in offering you a mortgage. A lender might choose not to offer you the mortgage after closely assessing you or the property.
Read this letter carefully since it will contain information about terms and conditions of the mortgage contract. It will also contain information about fees and charges payable by you as the borrower. Important mortgage terms could include and not limited to:
Amount of the loan
Interest rate
Repayment terms and period
Collateral
Any fees incurred in the transaction
Closing conditions
Material clauses of a Mortgage Contract
If you use a mortgage broker or 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 contract 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, known as covenants, as outlined below.
Mortgage lenders have an interest in the property a homebuyer is purchasing or refinancing. They want to ensure it is a sound investment in the event a homeowner can’t pay back the mortgage in full. Borrower covenants are set so the lender can take action if the homeowner is found to be irresponsible with the status of their home.
Typically, there are four financial obligations you agree to, as the borrower:
Repay the loan amount
Pay the property taxes
Pay the property insurance
Maintain the property in good condition
Mortgage lender covenants protect the borrower and ensure their mortgage contract 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
Leave the borrower in quiet possession of the property and not interfere with their use or enjoyment of the mortgaged property
Once the lender has received your signed contract, the closing process will start. Your mortgage broker/agent may continue to liaise between you and the lender and perhaps even the lawyers involved for you and the seller.
After the property sale closes and the lender provides the funds, your licenced mortgage broker or agent may send your file to the mortgage brokerage’s administration department or to the mortgage administrator of your choosing. They’ll track payments, calculate outstanding loan balances and might collect municipal property taxes. They may alert the mortgage broker/agent when your mortgage term is near completion so that the mortgage broker/agent can assist you with renewal or the selection of a new lender for the next term.
The mortgage contract with a lender is for a specified period of time, known as the term, that is less than the entire length of a mortgage (which is known as the amortization).
At the end of the term, homeowners will need to renew their mortgage commitment if the mortgage is not fully paid out. There is no guarantee that a lender will automatically renew the contract or, if it does, that the terms and conditions will remain the same.
A mortgage broker or agent can help homeowners negotiate new terms or take their mortgage to a new lender when it is time to renew the mortgage.
It is a good idea to contact your mortgage broker or lender well before you have to renew.
Life happens and you may find that you are unable to fulfil the mortgage contract you initially signed. When this happens, it’s called ‘breaking the contract,’ and it simply means you are choosing to end the mortgage before the end of the contract term.
Since a mortgage contract is a legal agreement, breaking the contract will require you to compensate the lender. Typically, this means paying a fee or penalty to end the contract early.
Each mortgage provider will have its rules around 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 in the mortgage contract. It’s important to understand the risks and penalties before agreeing to the contract.
Some of the common fees or penalties you may be charged:
Pre-payment: If a homeowner pays more than the scheduled amount or pays off the entire mortgage ahead of schedule
Early exit: If a homeowner 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 homeowner exits and renews their mortgage with a different lender or pays off the existing mortgage
Late payment: If a homeowner is late making a scheduled payment
Portable mortgage: If a homeowner moves to a new home and keeps the same mortgage contract
Change in use: If a homeowner changes how their property is used (e.g., residential to business)
A lender will also lay out the enforcement actions available if the homebuyer does not maintain the borrower covenants. The most serious enforcement action a lender can take against a homeowner is a foreclosure or a power of sale. This happens when the homeowner can no longer make mortgage payments. The lender will sell the home for fair market value to recuperate their investment.