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Are You Still Responsible After Selling?

Written by Posted On Tuesday, 02 May 2000 00:00

Canadian homeowners who allow their mortgage to be assumed, or taken over, when they sell their house or condominium may still be responsible for that mortgage until it is completely paid off -- even if that's years later. Homeowners attracted by the prospect of saving thousands in discharge fees when a buyer assumes the existing mortgage should make sure they understand exactly what risks a home seller faces through this action.

In many provinces, the original borrower remains personally responsible for repayment of the mortgage under a mortgage clause called the personal covenant. This is a legally-binding promise by the borrower or mortgagor that the mortgage debt will be completely repaid. Unless the lender or mortgagee will release the mortgagor when the mortgage is assumed by a buyer, the mortgagee may come after the original mortgagor if that buyer -- or the person that owner sold to years later -- fails to make mortgage payments, that is, goes in default of the mortgage.

Provincial laws vary in protecting the original borrower. In Alberta, homeowners are automatically released from the personal covenant when their mortgage is assumed. In Ontario, some mortgagees will release the mortgagor if the mortgagor finds the right person to ask and is very persistent. Other mortgagees will not release the mortgagor, whom they see as a guarantee they will not lose money on the mortgage.

When the mortgage debt is more than 75 percent of the appraised value of the home, there will be greater risk in an assumption than in cases where the mortgage is less than 50 percent of the value. As the mortgage gets older and older, the amount of the mortgage decreases and the risk to the original mortgagor decreases. If there is considerable value or home equity in the property, the mortgagee will usually choose to look to the property to satisfy the debt. Canadian law provides mortgagees with a legal remedy called power of sale that does not involve a time-consuming and expensive law suit to recover the outstanding debt. Instead, under the terms of the mortgage contract, the mortgagee has the legal right to sell the home to recover the debt when the mortgagor defaults on the mortgage.

If there is little value in the property and the current owner who is in default has no resources, the mortgagee may choose to sue the original mortgagor under the personal covenant to recover its money.

Mortgagees usually include a clause in their mortgage contracts that require buyers to be approved by standard mortgage-approval criteria before the assumption can go ahead. This requirement increases the odds that a mortgage will remain in good standing after it is assumed and until it is completely repaid but it is not a guarantee that things won't go wrong.

Before you let your mortgage be assumed, find out exactly how great your risk will be.

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