A private mortgage is a loan by a private entity (individual, corporation, partnership, etc.) that is secured by real property. Private mortgages may be used to secure existing debts, or they may be safe for new loans being advanced.
Institutional lenders are deemed to be sophisticated, as one of their primary business models is borrowing and lending of monies. There are a series of checks and balances in place to protect borrowers in the box of a standard institutional mortgage transaction. Private lenders on the other hand, as in the ordinary course of business, and as such may require additional advice with due diligence.
It is important to note that the role of your lawyer, who will be involved in the transaction, is not to provide business advice (ie, is the loan to ‘sound investment’?). Business decisions are made by the lender.
In 2008, the Province of Ontario passed the Mortgage Brokerages, Lenders and Administrators Act (the “Act”). The Act came into force on July 1, 2008 and it represents a major overhaul of the Mortgage Brokers Act. The Act added to a new licensing and regulatory regime for mortgage brokers, brokers, brokers and administrators who act as mortgage brokers in Ontario. The objective of the government of Ontario It provided a series of new protections for borrowers. Section 4 of the Act requires the parties to carry out business as long as they are registered under the Act and to hold a valid brokerage license. The section of the section (ie, in the business of mortgage lending).
Below I have outlined that you should be sure that you will be able to do this. This list is not comprehensive, and it is advisable to consult with each other.
- Loan / Mortgage documentation – having a solid loan agreement is of paramount importance. This document is intended to be used in the context of lending (ie, interest rate, term, maturity date …), the security to be provided, representations and warranties of the parties and so on. This is always the first step in the process.
- Additional covenants – are you satisfied with the borrower’s covenant to repay the loan? What steps have you taken to investigate the borrower’s covenant? Do you need any other loan?
- Value of the assets – you must satisfy yourself on the value of the asset. This is normally done by way of an appraisal. The ratio of loan to value is important. It will provide the lender with some protection in the event market values decline during the loan. It will also provide some room for the accumulation of costs and the debtors will be required. Other matters where the property is an asset producing property.
- Due diligence on physical nature of the assets – this would include such investigations as well as reporting, inspection, environmental studies, fire code compliance, etc …
- Title and off-title de diligence matters. These investigations typically include title searches, zoning inquires, work order searches, tax certificates, electrical safety authority compliance, etc.
Any party involved in a private mortgage must ensure that their interests are protected.
For more information on this subject, please contact a member of our Real Estate Group or call 613-238-8080.