When you sign a mortgage, you are placing some real estate you own as security for the repayment of a debt. Most often, that debt is taken out for the purpose of buying that same piece of real estate. Although your covenant to make your payments on a regular basis is the most obvious promise you make in a mortgage, there are a number of others which, if you break them, can result in you being in breach of your mortgage. Here are some of those promises:
You need to keep the building insured with first loss payable to the lending institution. If there is a loss, the lender gets paid from the insurance proceeds.
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There is always a promise to keep the municipal taxes paid. If the taxes go into arrears, the taxing authority can take tax enforcement proceedings against the property, such as a tax lien and taking title. These steps can affect the security of the mortgage.
The property must be kept in good repair. Nothing should be done to diminish the value of the property, and any renovation or construction work on the property must be done according to proper local zoning and building standards. The lending institution has the right under the mortgage to come in and inspect any construction projects that are underway, and if they are not finished in a timely fashion, to have the project completed and the cost put against the mortgage.
There should be no environmental contamination to the land involved, and the lending institution reserves the right to undertake testing for environmental contamination at the cost of the owner. If contamination is found, there can be an obligation on the owner to remedy that.
There are provisions that conducting illegal acts on the property (such as a marijuana grow operation or a meth lab) is a breach of the terms of the mortgage. There are also provisions requiring the owner of the property to comply with local bylaws and zoning restrictions.
There are usually prohibitions against parting with possession of the property by renting it out, or at the least, the requirement that the lending institution be informed if that happens, so that an assignment of rents to the lending institution might be made.
There is a requirement that the mortgage should be paid off from the proceeds of the sale. There is also language that prohibits the assumption of the mortgage by a potential purchaser unless the person is approved by the lending institution. This is important in a market where interest rates are low and are predicted to rise in the near future.
Assumptions of existing mortgages by potential buyers may become common in that situation, so remember that a buyer who wishes to assume a mortgage will have to be approved by the lending institution.
That should be one of the conditions listed in the offer to purchase.
Many of the provisions in a mortgage give rights to the lender that are never invoked, but it is important to know they are there.
