We recently completed a mortgage for client that was refinancing his property to get a larger mortgage and use the additional funds for investment purposes. The bank that he was looking to pay out had a clause in their mortgage that basically read “you cannot payout your mortgage unless the property has been sold”. This means that the bank would not allow the client to payout the mortgage unless he produced a sale agreement showing that someone unrelated to him was purchasing the property. Needless to say the client was extremely upset and couldn’t believe this clause was not explained to him when he took the mortgage.
Why does this matter? For someone that needs to refinance their existing mortgage to payout debts, free up funds for investment purposes or any myriad of other reasons and they do not want to sell their property, they are forced to consider taking a second mortgage at higher interest rates to access their equity.
For a quick comparison:
First mortgage for 5 years – 3.49% interest rate with no fee
Second mortgage for 1 year – 7.99% interest rate with a 3.0% fee
Obviously this matters to a borrower and can cost a lot of money.
Another reason is that banks do not fund second mortgages on properties – only mid-market and private lenders do. Banks need to be in first position on title and that is why they provide the best interest rates. So why do some banks put this clause in their mortgage document? Most times this is because of how a bank gets the money to fund your mortgage. Whoever gives them the money to fund your mortgage may have stipulated that the funds cannot be repaid unless there is a sale.
So what do you do? Make sure you know what you are signing when you put your signature on a mortgage document. Maybe there is a reason you received an incredibly low interest.
“Nothing in fine print is ever good news.” – Andy Rooney
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