Private Lending Key Terms 101

Why do some people say ‘charge’ instead of ‘mortgage’?

Are borrowers and debtors the same people?

What on Earth is a ‘restrictive covenant’?

Most industries have their own jargon in some form or another, and mortgages are no exception! There are so many key terms that come up in the world of private lending and mortgage enforcement, and they’re not always easy to decode. Sometimes even those in the know get confused, so we wanted to demystify the process a little bit.

It’s nearly impossible to do an exhaustive list, but here are some of the key terms that we run across daily and that our clients routinely encounter as well. Remember, these are just snapshots, and none of these definitions should be construed as legal advice. For advice on your particular matter, please contact our office to set up a consultation.

Action - This is one of the methods for bringing a matter before the Ontario Superior Court. You may hear the terms ‘action’ and ‘application’ - both involve a judge, but bringing an action means you can bring something to trial before a jury if matters go that far, and an application is only for issues dealt with in writing. Lawyers will often file what is called a ‘notice of action’ to inform the other side that a Statement of Claim is coming.

Binder - A binder is the property insurance confirmation a Lender generally requires to ensure insurance proceeds may be paid to them in the event the property where the loan is secured goes up in flames or floods and needs to be rebuilt. It provides proof of insurance. For detached homes, all risk fire insurance will be the appropriate coverage. For vacant land liability insurance is standard and for condos the Lender would generally request content or upgrades insurance. Third mortgagees may have trouble getting coverage in recent times.

Caution - A caution is placed on title to a property to signify that a third party may have an interest in the property. It effectively signals to interested buyers that someone else might own the property, and so it may not be readily for sale. This is to stop innocent, unknowing buyers from accidentally buying a property when they cannot get clear title, or unrestricted ownership of the property. Note that a caution does not last forever - only 60 days.

Charge - Think of ‘charge’ as another word for mortgage. You as the lender are effectively lending the funds for the purchase of the property in exchange for the repayment of that debt - either monetarily with interest, or for the right to reclaim the property if that debt goes unpaid.

Demand Letter - In a legal proceeding rarely does any dispute start with a Statement of Claim (although this can happen). Before any lawsuit, your lawyer may write the other side a ‘demand letter,’ which outlines what you are seeking and threatens to begin an action if the borrower does not give what is being demanded. The other side may respond with their version, or not respond at all, and litigation may proceed from there.

Discharge Statement - When a mortgage or loan is being paid off in full, a lawyer will prepare a discharge statement that formally outlines what is needed so that the loan is paid off which will include principal interest, and fees. Once the statement is paid off, the lawyer will attend to registered a mortgage discharge and the Lender releases is released from title and right to the property.

First Dealings - To make a long story short, there were two methods of registering title to a property in Ontario - the old Land Registry System, which then in the 1980s transitioned to the current Land Titles System that we have today. Some properties that have not changed hands since the 1980s are still on the old system, or slipped through the cracks. If the owner of that property dies, and their beneficiaries need to sell, a ‘first dealing’ of that property since the system changeover may help the sellers escape probate.

Foreclosure - If a borrower misses payments, a lender does have the potential to foreclose on the property. The lender actually takes title of the property (unlike in a power of sale), and then proceeds to sell the home on the open market. However, instead of returning any proceeds above and beyond the debt to the homeowner, the lender has the power to keep the entire proceeds of the sale. This is a less common process in Ontario, and is lengthier than a power of sale proceeding.

Lender - A lender is the same as a mortgagee or chargee - it’s the party that loans money against the security of a piece of property for purchase of that property, refinance, home improvements, or other purposes. Borrowers may work with lenders for a variety of reasons. There are different types of lenders, from banks which offer multiple products, to monoline lenders which only work with mortgages, credit unions, trust companies and to individual private lenders who often work outside of the traditional system.

Lien - Although a mortgage is technically a kind of a lien, a lien registered on title to a property is not a mortgage. A lien indicates a legal claim in favour of a creditor for amounts owing which can be repaid using the equity in the property. Liens on title are generally construction liens, tax liens, or can be created by a court-ordered judgment.

Loan to Value - The Loan to Value (commonly ‘LTV’) is the ratio of the amount of a loan to the value of a property. This is the amount of a mortgage divided by the total value of a property, and it is a key statistic that lenders look at before deciding to proceed with a mortgage as it lets the Lender know how much equity remains after all of the mortgages on title and other encumbrances are accounted for.

Notice Demanding Possession - The notice demanding possession is the formal notice provided to the property owner or tenants that you will be reclaiming the property, and they need to leave by a certain date. If they do not comply with leaving, then the Sheriff may take more forceable steps, although remember that the Sheriff cannot violate the Residential Tenancies Act and kick out paying tenants.

Notice of Security Interest - A notice of security interest is a lien on the property usually related to one of the physical utilities, such as a water heater or furnace. While homeowners frequently rent these machines, many do not realize that they’ve signed up for a rent to own, and the vendor actually has an interest in the property. These should be watched for in a purchase and sale, and can be an added piece to navigate in a power of sale.

Open Mortgage - An open mortgage gives borrowers flexibility over how and when to repay their mortgage, such as in a lump sum, larger payments, etc. Open mortgages don’t have the same penalties as closed mortgages, so they may be preferable (if available) for borrowers in a refinancing, or who intend on paying off their mortgage much quicker. Note that if you see an open mortgage with a prepayment penalty included, while this may be more common, it’s not actually a true open mortgage.

Parcel Abstract/Pin Page/Title - Every piece of real property (real estate) has a PIN - a specific number tied to that property that identifies it in the land titles system. A parcel abstract provides potential buyers with a more complete picture of a property’s history beyond just current ownership. It also includes the percentage of ownership, a history of ownership, and the registration and discharge of any liens, easements, notices of security interest, etc. It should also be reviewed by the Lender when beginning enforcement proceedings to ensure subsequent encumbrancers are properly notified. When a person requests a ‘copy of title,’ it generally refers to the pin page or parcel abstract.

Possession - Possession in the private lending world means exactly what you think it would. When you’re holding an apple and about to take a bite, you possess that apple. If someone takes that apple from you they have possession of it, and if you then take it back you have possession again. The same is true when it comes to property.

While the homeowners live in the property, they hold possession of the property. On eviction, the lender can change the locks and when the homeowners are out the lenders can take possession. The key to possession here is controlling entry or re-entry to the property - in apple terms, who can take a bite.

Power of Sale - When a borrower fails to repay their loan (mortgage or charge), the lender has the right to reclaim the property and sell it at fair market value in order to reclaim the value of their loan. This is a formal process where the borrower is alerted as to their default, and they have the option to bring the mortgage into good standing (if the mortgage has not matured or expired), or they risk losing their home. Read more about the Power of Sale process. It is more common than the foreclosure process in Ontario as it generally takes less time to complete from beginning to end.

Priority - On title to a property, there’s a hierarchy to who gets repaid first when money is owed. When a property is sold, there may be several liens on the property, including a mortgage, construction liens, notice of security interest (see above), etc. There are also taxes and utilities owing, legal fees, writs of execution, and other items to be paid out. Repayment is not a free-for-all, and priority is what determines who will be repaid first. This usually works in chronological order, with the oldest debts as the first to be repaid. Some of these creditors are repaid before any profits are seen from the sale. There are also potential exceptions, such as super-priority tax liens, which get paid before anything else.

Private Mortgages - Private mortgages are sometimes the best or only option for borrowers who do not qualify through a bank or a mainstream lender either as a result of poor credit history, self-employment, or for other reasons. These borrowers still require funds to make purchases, pay off debt, fund renovations, etc. For private lenders, private mortgages offer the opportunity for an individual to earn interest on their loans, and to claim the property as security in the event that the borrower is unable to repay.

Renewal Agreement - Once the initial term of the mortgage is winding down or complete, some lenders may offer borrowers the opportunity to renew their loan agreement, or to amend the terms of the mortgage. This can effectively extend the mortgage, but may do so on different terms than the original. The Lender is not obliged to renew mortgages.

Super Priority Lien - While some liens have priority over others, a super priority lien, which is a lien belonging to the Crown, takes precedence before any others. These liens exist under federal or provincial legislation, and do not need to be registered on title. For example, CRA has super garnishing powers, and can ensure that taxes are paid before any other monies are distributed.

Writ of Execution - When there is a judgment against a person who happens to own property, a creditor can obtain a writ of execution. It’s filed with the sheriff’s enforcement office, and is a key piece in the collection process. Even though these judgments are against the individual, they can also run with the property and take priority over other debts or encumbrances.

When conducting a title search on a property, an additional execution search should also take place to ensure that there are no executions outstanding. For a lender, these executions could impact the priority of their security, and in a sale transaction they could impact a buyer obtaining clear title.