Since 1994, under article 2797 of the Civil Code of Quebec, mortgage contracts have increasingly stipulated that the mortgage will serve to secure not only the loan contracted for the purchase of the property, but also the present and future obligations of the consumer, and sometimes of a third party, such as a spouse. This is known as an "acte de garantie immobilière" (or mortgage guarantee), also known as an "umbrella mortgage". This type of mortgage may not terminate when the mortgage is repaid, since it also guarantees the buyer's future obligations. To obtain an additional loan secured by real estate, the consumer must have repaid a portion of the mortgage, or the value of the real estate must have increased, on the home. The consumer must apply to and qualify with the lender.
The emergence of this type of contract raises many questions. What are the advantages and disadvantages for consumers? Can consumers save on interest charges? What is the difference between a real estate warranty deed and a traditional mortgage contract?
According to the industry, this type of contract offers a number of advantages. It facilitates access to credit and saves consumers from legal fees. In fact, it allows the borrower to take out other loans without going before a notary again, since the deed generally stipulates that the mortgage guarantees all the borrower's present and future obligations to the creditor. Some lenders, such as Laurentian Bank, still offer the possibility of a traditional mortgage; others, including National Bank, no longer offer this type of mortgage.
Currently, according to the lenders we spoke to, in practice, real estate mortgages are not used to secure consumer-related debts, except in the case of bad debts.
The experts we spoke to tell a different story. For example, according to Marc Boudreault, a retired professor at the University of Ottawa's Faculty of Law, clauses in real estate warranty deeds lack clarity, and consumers are often unaware of the scope of their commitment. They don't find out until they're at the notary's office, when it's too late to negotiate with their financial institution.
On the other hand, in the case of a joint loan, it is possible for the mortgage to secure all the third party's current and future debts, without the co-borrower even being notified of the new loans. What's more, in the event of the sale of the house, in order to obtain a discharge, the consumer could be obliged to repay not only his mortgage, but all the loans secured by his immovable mortgage, including the debts contracted by his spouse. This type of loan could also lead to overindebtedness.
For its part, the Office de la protection du consommateur (consumer protection office) is particularly concerned by the fact that a consumer could unknowingly subscribe to such an act.
To get a better idea of the problem, we conducted 20 semi-structured interviews with consumers who had taken out a mortgage in the last 12 months. The results? Most of them were unfamiliar with the features of their credit tool. For example, of the 13 people who appeared to have a deed of guarantee on their property, only 3 indicated that this contract could potentially cover other loans. It would appear that the consumers surveyed did not pay attention to the contractual details.
To explore this question, we conducted four focus groups, two in Montreal and two in Quebec City. On the whole, participants had little knowledge of their mortgage product, although some felt they were well informed on the subject. During the focus groups, we distributed a fact sheet explaining what the real estate warranty deed is and how it differs from the traditional mortgage.
After informally explaining the concept to them, some began to question whether the umbrella mortgage was the type of mortgage they had. Many felt they had a traditional mortgage, even though the text they had just read matched almost perfectly the description they themselves had provided at the start of the session, when asked to explain the contents of their mortgage contract. Despite these information gaps, focus group participants indicated that they were not in favor of legislative intervention. They do believe, however, that consumers should be more on their guard. Given the choice, participants would not opt for an umbrella mortgage.
Next, we identified the laws governing real estate security deeds in Canada and analyzed the legal framework of these laws, first in Quebec, then in Ontario, British Columbia and Newfoundland-Labrador. This enabled us to understand the scope of the legal obligations provided for by the hypothec according to the main principles of the Civil Code (in Quebec) and Common Law (in the other provinces), as well as the legislation governing real estate transactions specific to these provinces.
The result? In principle, because of its accessory nature, a mortgage is extinguished when the principal claim no longer exists. What about mortgages securing present and future obligations? In Quebec, under article 2797, the creditor is entitled to refuse a request for a discharge granting the debtor's cancellation, even if the debtor has repaid the principal loan in full. The problem? Future obligations are still subject to the mortgage.
Based on article 2707, the creditor may refuse to grant the debtor cancellation of the mortgage until all other obligations contracted by the debtor towards the creditor or a third party assimilated to the creditor have been paid in full. It's easy to see the legal problems this could raise. Consumers must be cautious, and ask their financial institution about the real scope of their mortgage. However, mortgage advisors may be ill-informed.
In Quebec, there is no law requiring the lender to inform the debtor of the extent of the mortgage. Elsewhere in the country, only the provinces of Newfoundland-Labrador and British Columbia appear to oblige the mortgage lender to disclose the extent of the charge. The others seem to adhere to the cost of borrowing and rate disclosure requirements created by the Interest Act and the Cost of Borrowing Regulations and included in their respective legislation.
