Important Mortgage Contract Clauses in Quebec and Canada

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The mortgage contract contains several essential clauses that every Quebec borrower must understand before signing. The interest rate clause defines whether the rate is fixed or variable and its application conditions. The prepayment penalty clause specifies the costs to repay the loan before term maturity, typically the higher of three months' interest or the interest rate differential (IRD). The mandatory insurance clause requires maintaining home insurance and, for down payments below 20%, mortgage loan insurance (CMHC, Sagen or Canada Guaranty). The default clause defines the conditions constituting default (late payments, failure to maintain insurance, property détérioration) and the lender's remedies. Renewal, transferability and amount increase clauses are also important. The AMF-certified mortgage broker has the obligation to properly explain these clauses to the client in accordance with the LDPSF and the Code of Ethics.

Essential Mortgage Contract Clauses

The mortgage contract is a complex legal document that commits the borrower for several years. In Quebec, this contract is governed by the Civil Code of Quebec and must be constituted by notarial act. Understanding the important clauses is essential for making an informed choice and avoiding unpleasant surprises during the term.

Interest Rate Clause

The interest rate clause is obviously central. It specifies whether the rate is fixed (unchanging during the term) or variable (fluctuating based on the lender's prime rate). For variable rates, the clause indicates whether payments are fixed (with adjustment of the principal/interest split) or variable. The effective annual rate must be clearly stated in compliance with disclosure requirements.

Prepayment Penalty Clause

This clause is among the most important and most costly if it applies. The penalty is generally calculated as the higher of three months' interest or the interest rate differential (IRD). The IRD represents the lender's loss of revenue for the rest of the term. The broker must clearly explain this clause and simulate penalty scenarios so the client understands the potential costs.

Other Key Clauses

Mandatory insurance clause: requirement to maintain adequate home insurance and, if applicable, mortgage loan insurance
Default clause: conditions constituting a breach and lender's remedies (prior notice, exercise of hypothecary rights)
Renewal clause: conditions and timelines for loan renewal at term maturity
Transferability clause: ability to transfer the mortgage to a new property
Partial prepayment clause: accelerated repayment privileges (typically 10% to 20% per year)

Mortgage Broker's Obligation

Under the LDPSF and the Code of Ethics for mortgage brokerage representatives, the broker has the obligation to act in the client's best interest and explain the important contract clauses. The broker must ensure the client understands the financial and legal implications of each clause before signing at the notary's office. This duty to advise is fundamental in the broker-client relationship.

Frequently Asked Questions

How is the prepayment penalty calculated?

The penalty is generally the higher of two amounts: three months' interest on the remaining balance or the interest rate differential (IRD), which represents the difference between the contractual rate and the lender's current rate for the remaining term. The IRD calculation varies by lender and can amount to thousands of dollars.

What insurance is mandatory in a mortgage contract?

Home insurance (against fire and other risks) is always mandatory to protect the secured property. Mortgage loan insurance (CMHC, Sagen or Canada Guaranty) is mandatory when the down payment is less than 20%. Mortgage life insurance is optional, despite what some lenders may suggest.

What constitutes default under the mortgage contract?

Default typically includes non-payment of mortgage instalments, non-payment of property taxes, failure to maintain home insurance, significant property détérioration, use of the property for unauthorized purposes and failure to comply with any other major contractual obligation.

Is the transferability clause important?

Yes, the transferability (portability) clause allows transferring the existing mortgage to a new property when moving, thereby avoiding the prepayment penalty. Not all lenders offer this option, and conditions vary. The broker must verify this clause when comparing offers.

Must the broker explain all clauses to the client?

Yes, the AMF-certified mortgage broker has a legal and ethical obligation to explain the important clauses of the contract to the client. This includes the rate, penalties, default conditions, insurance and prepayment rights. Failure to meet this obligation constitutes a disciplinary breach.