We have come across a few mortgages lately that provide for very restrictive prepayment rights. Many mortgages will limit early repayment, without payment of a prepayment charge, to a certain percentage of the original principal amount and/or to increases to the regular payments to help pay down the mortgage quicker. However, in recent months, we have seen a couple of mortgages which prohibit the payout of a mortgage, even with a prepayment charge, except in specific circumstances such as a sale of the property or death of the borrower.
Although these mortgage products may be appealing to a borrower because they may come with a lower interest rate, it is important that the borrower we aware of, and fully understand, the restrictions on early payout. Specifically, if the borrower wishes to refinance their property for some other purpose in order to access the equity they hold in the property, their existing lender may prohibit them from doing so. This may be of particular interest for borrowers with a lower loan to value ratio on their property such that there is a significant amount of equity in the property from the time it is acquired or financed. Down the road, if the borrower wishes to access the equity they hold in the property, perhaps to acquire a down payment for another property, they may be restricted from doing so unless they refinance through their existing lender (which may not be offering the best rate at the time).
Borrowers should be advised to speak with their mortgage broker or banker with respect to prospective plans, or contingencies, to ensure that the mortgage product they ultimately select will not impede their future use of equity in the property. In some cases, a restriction on future prepayment may not be a concern, but this restriction should be balanced against the savings with the reduced interest cost. In addition, a borrower often doesn’t know what the future may hold and they may need to access that equity for an unexpected purpose.
Author: Una Gabie
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of business law at the following:
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