Private mortgage means added reporting obligation for lawyers
By AdvocateDaily.com Staff
A new mortgage ‘stress test’ introduced last fall may ultimately lead some first-time homebuyers and those with an increased household debt load to turn to private, unregulated lenders — which triggers an increased reporting requirement for lawyers involved in these transactions, Toronto real estate lawyer Anar Dewshi writes in Lawyers Weekly.
As Dewshi, principal of Dewshi Law Practice, explains in the article, on Oct. 17, the federal government introduced new mortgage rules to respond to the effects of low interest rates that have resulted in record high household debt.
“One of the key changes is the eligibility for new government-backed insured mortgages. All homebuyers seeking an insured mortgage from federally regulated lenders, regardless of the amount of the down payment, will be subject to a mortgage stress test,” she writes.
The mortgage stress test applies the typically higher Bank of Canada posted rate when calculating a borrower’s gross debt service (GDS) and total debt service (TDS) ratios to evaluate the homebuyer’s ability to repay the loan in a higher interest rate environment or with a reduction in household income, writes Dewshi.
As of mid-October, individuals applying for high-ratio insured mortgages, defined as those with a down payment of less than 20 per cent, must have a GDS ratio no greater than 39 per cent and a TDS ratio no greater than 44 per cent. Low-ratio insured mortgages — with a down payment of greater than 20 per cent of the purchase price — have additional conditions, says Dewshi, which include: a loan whose purpose includes the purchase of a property or subsequent renewal of such a loan, a maximum amortization period of 25 years, a property value below $1 million, a minimum credit score of 600 and, if the property is a single unit, it will be owner-occupied.
“The new mortgage rules will certainly have an impact on first-time home buyers and those with increased household debt load. The new rules will make it harder for them to obtain mortgage funds because they will likely not be able to pass the mortgage stress test. This will make high-priced homes unattainable but as a result, they will be prevented from taking on a mortgage that they cannot afford, which is ultimately the objective behind new federal mortgage rules,” she writes.
However, Dewshi explains, those who are unable to purchase their home through federally regulated lenders may turn to private, unregulated lenders — those who are not a Schedule I or II bank, registered loan or trust company, licensed insurer, or a subsidiary.
“Private mortgage lenders are unregulated, not mandated to carry mortgage insurance and charge an interest rate of 7 per cent to 10 per cent, at least double the rate of traditional lenders. Although private mortgages are a means to an end for potential homebuyers, they bring with it increased risk to financial stability and increased debt load,” writes Dewshi.
As such, she explains, real estate lawyers should be aware of the specific professional responsibility rules related to private mortgage transactions in the Law Society of Upper Canada’s By-Law 9, Financial Transactions and Records.
“Increased reporting is required by lawyers, namely, Form 9D, Investment Authority and Form 9E, Report on the Investment. Lawyers must not represent both the lender and the borrower in a private real estate transaction due to conflict of interest concerns.”
Lawyers should also advise borrowers about the risks associated with private mortgages — namely the risks of the high interest rate to household debt and failure to maintain payments which may lead to power of sale or foreclosure, adds Dewshi.
Ultimately, she explains, although alternatives are available to potential homebuyers, “it is advisable for buyers to either look for a less expensive home or wait until a larger down payment can be accumulated.”