A secured credit line is a mortgage

I’ve blogged about this before, but it bears repeating because it seems that people are still not being properly advised: when you get a secured credit line, it is legally a mortgage. It will be registered on title to your house. It will have to be paid in full when you sell or refinance. And it will affect your ability to get any further financing on your house.

Secured credit lines can be a great way to have access to cheap credit, but be aware of what they are.

How do you own your house?

If you own a property with another person, there are two ways of sharing ownership: joint tenancy, or tenancy in common.

Joint tenants have a common undivided interest in the entire property; that is, everyone owns the whole thing in common with everyone else. This means, in practice, that the last person left alive gets the whole property, because there are survivorship rights.

Tenancy in common means that each owner owns a percentage share, whether equal or not, depending on the decision at the time they took title. On death, each owner’s share passes to their estate.

Whether you own as joint tenants or tenants in common depends on several factors. If you are buying with your spouse, out of joint family funds, then you may be more inclined to joint tenancy. If you are buying with a business partner or friend, or with a partner you are about to move in with for the first time and are investing unequal shares, you may be more inclined to tenancy in common.

You should also note that, at any time, a joint tenant can sever the joint tenancy and make their share in common – and can do this with no notice to the other owner(s).

Before you buy, you should have a conversation with your lawyer about the best way for you to take title.

How do you know you’re ready to buy your first home?

With prices going up and down, and mortgage rules getting increasingly tight, it can be difficult to know when it is the right time to buy, especially if you’re buying for the first time. Here are some signs that it’s time for you to jump into the market:

  1. You have a reliable source of income. If you still aren’t sure where your next paycheque is coming from, or how much it will be for, it’s not the right time, unless you have enough saved to not need a mortgage.
  2. You have saved at minimum 5% of the purchase price, plus extra for closing costs and unexpected repairs in the first six months of home ownership. The closer to 20% down payment you get, the less you have to pay in default insurance, so having a healthy down payment can actually save you money. Having at least your down payment means you aren’t borrowing even more toward the purchase, and you will need to cover your own closing costs, which will likely include at least some land transfer tax. The more you have saved, the more you will save. Don’t rush in until you’re ready.
  3. You don’t have significant other debts. You don’t want to be house poor – and if you have a lot of other debts, you will be. If you have a lot of debt, you may want to wait until you’re in better financial shape.
  4. You’ve spoken to a professional (mortgage broker or agent) and have a sense of all of your monthly expenses for the house you’re looking at, as well as all of your closing costs. You need to be prepared before taking this leap.
  5. If you need to have someone co-sign the mortgage, you have an exit plan to get them off within five years. With mortgage rules tightening up daily, expecting all first-time buyers to be able to buy alone may be unrealistic. However, you don’t want to leave your parent or other co-signer on title forever. If you need help, have a good plan in place to be able to qualify for a mortgage on your own by your first renewal.

How to make your mortgage approval disappear

If you have applied for a mortgage, you usually want to go ahead with it. This is especially true if you are using a mortgage to finance a purchase of a new home. Sometimes, things about the mortgage will change between application and closing – if you get a variable rate mortgage, for example, and rates go up. Sometimes, however, something you do affects the mortgage and causes issues on the day of closing. Here are some things not to do once your mortgage has been approved:

  1. You change your employment. Whether it is to a new job, or changing your hours or payment structure, if your employment changes, you could jeopardize your approval. Always speak to your bank or broker before doing this if it will happen before closing.
  2. You take on more debt. Don’t buy a car, borrow significant amounts on a credit line, or let a credit card go overdue. A change in credit will definitely affect your mortgage.
  3. You co-sign someone else’s loan. Even if the debt isn’t yours, if it will show up on your credit check, your mortgage lender won’t like it.

Before you take any financial action that could affect a mortgage you can’t afford to lose, check with a professional advisor.

Selling with a power of attorney

If you need to be away when your house is for sale, or if you become incapacitated or physically unable to sign paperwork, it is possible to sign by way of a power of attorney.

If you have an existing Continuing Power of Attorney for Property, this can be used to sell your home. If not, you can either create a new one, or sign a Limited Power of Attorney for Property that deals just with the specific property you are selling.

Either way, the power of attorney is registered in the local Land Registry Office so that it can be referenced on the sale document. You will need the original power of attorney; a copy will not do. Your lawyer will also likely want to talk to you, or to a doctor if you are incapable, to be sure that it is being used appropriately.

If done properly, powers of attorney can make a sale go much more smoothly in difficult situations.

A secured credit line is still a mortgage

Be aware. If you’re selling, and you have a credit line that you borrowed against your house, this must be paid off. Factor it in to your bottom line so that you’re not shocked when the closing date comes around. And if you’re buying, be prepared to see it get registered against your new home – you get that nice low interest rate because your house is security. Legally speaking, it’s a mortgage, and the bank will treat it as such.

What does title insurance do?

In a recent real estate post, I discussed the need for a survey and why, often, it’s not as critical as it once was. The main reason for this is because of title insurance.

Title insurance, in a nice syllogism, insures your title. Basically, it protects you against issues that could come up to affect your ownership of the property that you did not or could not have found out about before your bought it – things like unregistered easements on your property, or encroachments from your neighbour’s property, or a prior owner doing work without a permit that would have normally not been permitted by the municipality. It also covers for fraud, in the event that someone impersonates you and puts a fake mortgage on your property or tries to sell it.

If you are getting a mortgage, you will almost always be required to get title insurance. Even if you aren’t, it’s usually a good idea – it’s low cost, and can give you peace of mind.

Do you need a survey?

The answer is, sometimes.

If you can get a survey, they’re very useful. They can tell you all sorts of things – the legal limits of your property, whether there are any hydro or sewer lines, if there are any easements, even the proper location of a fence or your house. Often, however, a new survey isn’t available when you buy a house, if a survey is available at all.

If you are buying in an urban centre, the likelihood is that you don’t need a survey. It’s nice to have, to see where your lot lines are, but any encroachments from neighbours or easements that were never registered would usually be fully covered by your title insurance, so it’s not critical to have a survey up front.

Where it becomes more complicated is if you’re buying in a more rural area, and particularly if there are any questions about access to your property. Having a right-of-way to use someone else’s property to access your own can be a difficult matter to deal with; if it turns out that the travelled road is not where the legal description says it should be, the other owner doesn’t have to let you continue to use the travelled road. And then you could get stuck with no access to your property.

If you’re buying a subdivision house in town and there’s no survey, talk to your lawyer but you probably don’t need to worry. If you’re buying anything out of the ordinary, you may want to think twice before agreeing to not have a survey.

Signing paper in a digital world

You’ve completed your offer and any signbacks over email, by signing it electronically. Then you get to the lawyer’s office and see a stack of paper. What’s up with that?

In Ontario, lawyers must have original documents signed on paper.  While it might be nice to sign everything electronically, we can’t do that unless the laws are changed.

Yes, we use a lot of paper. Unfortunately, we have to.

Review Before You Sign

Most purchasers and sellers send their agreements to their real estate lawyer after the agreement has already been signed. At this point, it is typically too late to amend or get out of the deal. This is why it is important to have your lawyer review the agreement prior to signing.

If your purchase or sale agreement is conditional on lawyer’s review, then your lawyer can go through the entire agreement. Through this review, a lawyer can determine whether any changes should be made. Without a review clause in the agreement, the purchaser and seller are bound by the terms in the agreement. A review of the agreement can address issues at the outset of the real estate transaction, saving you time and money.

This is particularly true with the purchase of a property which has not been built or with the purchase of a condominium. These types of purchase transactions tend have lengthy agreements. Having a lawyer review these documents means that all the details are examined thoroughly.

The purchasing or selling of a house is one of the largest transactions that you will make in your life. Why not have a lawyer with expertise in this area review your agreement?