Mortgage Caps And When You Need a Lawyer
By Jayson Schwarz

Today I thought I would start by answering a question posed by one of our readers. The question relates to the issue of mortgages and how long a "capped" rate remains in place. Let me begin by explaining about "capped" rates. As a new home purchaser, it is critical that you should have received bank pre-approval of the mortgage, in the form of a written commitment, for the money that you need to buy the property. The mortgage commitment should provide for, among other things, amount, term, rate and special items. The commitment should also provide for a very important item . . . how long the lender will guarantee the rate that has been committed to you.

Okay, let me explain. Let us assume that on January 1, 2000, you are buying a property with a closing date of December 31, 2000 and your rate commitment or "cap" as shown on your commitment is for a period of fourteen months at 6.4%. What this means is that, as long as the deal closes on or before the date that is fourteen months from the date of the commitment, the bank will honour the rate to which they have agreed. Sometimes deals are extended past the time that the "cap" guarantees. What happens? The lender is no longer legally bound to honour the old rate. In our example, if the rates moved up to 7.5% and the closing was extended to June 30, 2000, the lender would have the option of telling you that the new rate was 7.5%.

There are more issues, as you will have to decide if you still want the mortgage and the lender will have to decide if it would still be prepared to give it to you. Remember, if rates rise, the money needed to carry the same amount of mortgage also rises and, if you were tight on your financing, you may no longer qualify. The moral of the story is to ensure that you negotiate a "Cap" for as long a period as possible. Quite often the mortgages offered by the builders on site have built-in extension protection. Ask for it as part of your purchase agreement from the builder or commitment letter from the lender.

When do I need a lawyer? Lately I have had a large number of new buyers come to me after the 10 day cooling off period for condominiums, or the conditional periods in a regular new home offer, have expired. When I ask why they waited, the most common response I here is: “I didn't think I needed a lawyer until it was time to close.” A lawyer must advise you at the time you make your offer, to help you understand clauses that could unexpectedly cost thousands of dollars on closing. It is critical that you see a lawyer before your deal is firm. It is important that your lawyer explains all the potential costs you will face, as well as the potential changes and delays you may encounter. Insist on this, and if you don't get what you want or need, see another lawyer.

Once you understand these issues, you can return to the builder and negotiate your purchase from a position of knowledge. Lawyers are service providers just like anyone else and, as the customer, you deserve the necessary information to make an educated decision.

There is a clothing retail chain that I remember in Florida that has a slogan which sounds sort of like, "An educated consumer is our greatest asset". This holds true for much of life and, seeing as this is one of the most important purchases you will ever make, you should become an educated consumer! Only a lawyer will point out the good and the bad, and will by law explain title insurance and by law have the responsibility to take care of you.

That's all for today, and remember, only a lawyer can give legal advice. Happy home hunting.

Jayson Schwarz is a senior partner with the firm Schwarz Gillen Barristers and Solicitors. He can be reached at (416) 486-2040