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I cannot believe how certain builders (“Vendors”) are trying to take advantage of new homebuyers on the issue of mortgages. There is an attempt to squeeze extra money from innocent purchasers through certain clauses inserted into the Agreement of Purchase and Sale (the “Offer”), that follow the first clause illustrated and change something good, into potentially a trap for the unwary buyer:
1. “The Purchaser agrees to apply to a lending institution designated by the Vendor . . . to assume any existing first mortgage . . . The first mortgage shall bear interest to be fixed by the lending institution at a rate not to exceed % and have about years to run. . . “
This clause makes sense and allows certainty for both sides. Where the buyer gets potentially damaged is when this clause is combined with the following one or two clauses:
2. “If at any time prior to the completion of the sale, the Vendor determines that it is unable for any reason whatsoever to arrange first mortgage financing for the subject property with a lender of its choice, this Agreement may, at the Vendor’s option, be declared null and void and the deposit money returned to the Purchaser without deduction or interest.”
This is scary. First of all you have a Vendor with no restrictions or obligation to be reasonable and this Vendor will probably react only out of self-interest. Our poor buyer, if terminated doesn’t even get interest on his deposit and this clause could be used right up to closing.
3. “It is agreed and understood that the term of the first mortgage may be varied at the option of the Vendor, by decreasing it by not more than 20% of the total term . . . In the event the vendor has not received a mortgage commitment . . . above described, Purchaser agrees to accept such mortgage upon such terms and at such interest rate as the Vendor is able to arrange, provided that the interest rate . . . shall not exceed the interest rate shown above by % . . .”
What this clause is gives the builder is the unrestricted option to reduce the term, as an example from 5 to 4 years (lowering the cost of money), and increase interest over what you thought you were getting at the beginning. A fairly sneaky builder could get a commitment that builds in a percentage of your mortgage payments as a bonus to the builder. This clause could be used by an unscrupulous builder, to the extreme detriment of an innocent purchaser.
© 2003 Mortgage Professionals Inc. Calum Ross Mortgage Consulting Team
Calum Ross is Vice President and Senior Mortgage Consultant with The Mortgage Centre. He has appeared on Canada AM, Investment Television, Report on Business Television, City TV, and is a regular mortgage columnist. He is the holder of both a B.Comm and MBA in Finance |
