Optimizing real estate financing: mortgage subrogation explained
In the scope of a real estate project, the conversion of a construction loan into a long-term loan is a key step in ensuring the continuity and viability of the project’s financing. This article aims to clarify the mechanics of mortgage subrogation, a legal and financial tool for optimizing financing conditions, in particular by enabling a change of lender without recourse to a new mortgage.
Definition
Subrogation is defined as “the replacement, in a legal relationship, of one person by another (…) ” 1.
Essentially, the process of conventional mortgage subrogation involves a new lender taking the place of the old lender and repaying the loan to the original lender 2. The existing mortgage granted by the borrower is maintained, without modifying the amount of the guarantee or the amortization period. As a result, the borrower’s debt is not extinguished, and the new creditor is subrogated to the rights of the old creditor under the terms of the guarantee 3.
Advantages of subrogation
Mortgage subrogation offers several advantages over full refinancing. It can reduce certain costs associated with a change of lender. Furthermore, the terms of the original loan can be maintained.
Mortgage subrogation is an alternative that may be considered, particularly when a new lender offers more attractive financing terms than the original lender, as part of the conversion of a construction loan to a long-term completion loan. This process is all the more appealing when the loan is already insured by Canada Mortgage and Housing Corporation, for example. It is thus possible to proceed by way of conventional subrogation so as not to extinguish the loan that was the subject of the insurance certificate. Provided certain parameters are met, it may be possible to retain the same loan insurance while obtaining long-term completion financing with a new lender. In this way, the borrower would not have to pay again for the insurance certificate, and the lender could benefit from the insurance on its loan.
That said, certain preliminary steps are essential to ensure that the subrogation process runs smoothly. In particular, it is important to ensure that the mortgage deed and insurance certificate do not contain any clauses that could be detrimental to the new lender, or any provisions that would prevent the loan from being subrogated. The new lender must also ensure that the loan has been and is being administered in accordance with CMHC requirements, if applicable. Likewise, due diligence must be performed by the new lender, including off-title searches and title examinations, among other essential elements. It goes without saying that these verifications are of crucial importance and must be carried out with the utmost rigor.
Finally, it’s important to note that the subrogation process must respect certain legal provisions and practical elements to be fully effective. We are at your disposal to answer any questions you may have and to guide you through the process.
1 Dictionnaire de droit privé et lexiques bilingues – Les obligations, sub verdo, « subrogation conventionnelle ».
2 Code civil du Québec, RLRQ, c. CCQ-1991, art.1651.
3 Gosselin c. Trottier, 2009 QCCS 2202, par. 75-77.
By Maika Dion-Test, notary, and Louisa Kouretas, student.