Rules surrounding the discharge of an hypothec

To make real estate transactions more secure for all stakeholders, notaries are subject to strict rules regarding the requesting of account statements for the repayment of a loan balance to discharge an hypothec on an immovable. Today clients have access to different types of credit that can be secured by an immovable hypothec. Faced with this diversity, mortgage lenders have issued directives under which they will only discharge the hypothec on the immovable once the seller has satisfied all loans and other forms of credit granted and secured by the immovable in question. We already understand the possible impact on a real estate transaction, an even greater impact if this is one of the links in a chain transaction.

A simple example

An owner has an immovable worth $210,000 which he acquired in April 2009 using a $190,000 loan secured by a hypothec on the immovable. When the owner got his mortgage loan, the lender offered him a $10,000 line of credit and a credit card with a $5,000 limit, also secured by hypothec. The total amount secured by immovable hypothec is therefore $190,000 plus the line of credit and the credit card limit, for a potential maximum of $205,000.

If the owner had bought the same immovable the following year, the maximum amount of guarantees on the immovable would not have been so high. Indeed, due to the review of regulations made by the government in May 2010, the CMHC will no longer be able to insure a loan including a mortgage line. As the product with mortgage line is therefore limited to a loan-to-value ratio of 80%, the maximum loan including the credit line and credit card would have been $168,000 i.e., 80% of $210,000.

Nevertheless, the notary must obtain a CERTIFIED STATEMENT OF ACCOUNT from the mortgage lender in order to discharge the mortgage guarantees on a given residential immovable. To do the discharge, all the debts secured by immovable hypothec (in our example, the mortgage loan, the line of credit and the credit card) must be repaid.

It is easy to see the difficulties that can be created if the sale of the immovable does not cover all the sums due under the various types of credit. The notarial rules imply that unless this certified account statement is received showing that all sums due have been repaid and including a firm commitment to sign the discharge of the hypothec within forty-five (45) days following repayment of the sums indicated on the statement, the notary will automatically withhold the funds until the discharge of the guarantee(s) is published.

IN CONCRETE TERMS, THIS MEANS THAT THE TRANSACTION CANNOT BE CONCLUDED UNTIL THE TOTALITY OF SUMS OWING HAVE BEEN REPAID.

Duties of the real estate broker

Real estate brokers have an obligation to obtain the balance of the selling client’s loan secured by hypothec as part of their duty to verify. Beyond that, they must also verify with the selling client whether the hypothec is securing any debts other than the mortgage loan, for example a credit card or a line of credit.

The surest way to obtain accurate and up-to-date information is by looking at the MORTGAGE ACCOUNT STATEMENT.

The OACIQ therefore recommends that real estate brokers ask their selling clients to obtain an account statement from their mortgage lender as soon as the brokerage contract is signed. This statement should contain the detail of all the products covered by the mortgage guarantee. If they wish, real estate brokers can also use the "Request for information relating to a hypothecary loan'' recommended form, which should be signed by owner(s) and by the financial institution representative.

In terms of his duty to inform and advise, the real estate broker will have to explain to his selling client the problems he will face if his hypothec was used to secure several types of credit, and the choice he must make when selling the immovable put up as security for this credit.

When the 72-hour notice mechanism is set in motion…

In the case of a promise to purchase that is conditional upon the sale of the buyer’s home and once the 72-hour notice mechanism is set in motion, the proof of financing provided by the first buyer will have to include a mention that the mortgage lender will discharge the mortgage and consequently that all loans linked to the hypothecary guarantee will be repaid by the buyer.

In summary, the OACIQ recommends that real estate brokers take the following steps:

• obtain the balance of the loan secured by hypothec from the selling client;
• verify with the selling client’s whether the hypothec is being used to secure anything other than the mortgage loan (e.g. a line of credit);
• ask the selling client to obtain a statement of account from the mortgage lender, or to have him sign the ''Request for information relating to a hypothecary loan'' recommended form, as soon as the brokerage contract is signed;
• explain to the selling client the problems he may face if his hypothec is being used to secure several types of credit and should the product of the sale not be sufficient to cover all the sums owed to the mortgage lender.