Should the Purchaser Assume Your Mortgage?

January 2011

Are you thinking of buying a property? Do you require financing? Then, you will very likely sign a mortgage. Note that, in most cases, the acquisition of a property is financed by a loan granted to the purchaser ("borrower") by a lending institution ("lender"). The borrower grants a mortgage against the property in favour of the lender as security for the promise to repay the loan.

The legal effect of the mortgage is relatively simple to understand: the mortgage consists of an encumbrance on the legal estate of the property owner. The borrower will not then be allowed to sell or dispose of the property unless the mortgage is removed from title at the registry office (or otherwise dealt with by an agreement with the lender, which is a rare occurrence).

A component of every mortgage is the interest rate. Section 6 of the Interest Act (a federal law) provides that where interest is calculated other than yearly or half-yearly, and if repayment is by way of blended payments (meaning that each payment incorporates an amount on account of principal and another amount on account of interest), then to comply with section 6, the equivalent rate of interest as if calculated yearly or half-yearly must also be stated. Section 6 is intended to ensure that the borrower is fully aware of the amount of interest for which he or she is responsible.

If you intend to sell your property and you wish the purchaser to assume your mortgage (as you would absolutely like to save the penalty associated with reimbursing your mortgage before maturity), you should consult your lawyer. Such an option carries risks. If the purchaser of your property assumes your mortgage with the intent to continue it until maturity, and if that purchaser defaults under that mortgage, you are still responsible to the lender even though you are no longer owner of your former property. Think it through thoroughly! Consult your lawyer before signing the agreement of purchase and sale which would provide that the purchaser would assume your mortgage. The savings that you could make by having the purchaser assume your mortgage could prove to be of little comfort in the long run. See to it!

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Raymond H. Gouin
2276 St. Joseph Blvd
Orléans, ON
K1C 1E8

Phone: (613) 830-0681
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