Does a mortgage lender have the right to add the outstanding balance on your Visa card to the amount outstanding on your mortgage?
That was the issue in a 2009 court case involving Toronto law firm Dale & Lessmann LLP and the Royal Bank of Canada.
When Dick Soong defaulted on the Royal Bank first mortgage on his house in 2007, the bank sold it under power of sale and applied the proceeds to pay off Soong’s $180,000 Homeline Mortgage and his $60,000 line of credit.
The law which applies to power of sale proceedings requires that surplus funds be used to pay off debts subsequent to the first mortgage in the order of their priority.
In this case, there were two other mortgages on title. One was to ensure that the fees of Soong’s trustee in bankruptcy got paid, and the other was for Soong’s legal fees. After the power of sale proceedings, the Royal Bank applied about $30,000 in surplus funds to pay off Soong’s RBC Visa card debt instead of paying it to the second and third mortgage lenders.
Last year, the law firm asked the Ontario Superior Court to determine who had priority over the leftover money — the Royal Bank for its Visa card debt, or the second and third mortgage lenders.
In 2005, Soong signed a Homeline Agreement with Royal Bank. Under this agreement, Soong placed an RBC mortgage on his house. The mortgage secured a conventional mortgage plus a variable rate line of credit. No reference was made in the contract or the mortgage of a Visa card agreement which had been signed 11 years earlier.
In August last year, the dispute came before Justice Harvey Spiegel, who had to decide whether the bank’s Homeline Agreement entitled it to lump the Visa card debt into the mortgage or whether the subsequent mortgage lenders had a prior claim to the money.
The judge carefully reviewed the terms of the Homeline plan agreement and ruled that the Visa debt was not secured by the RBC mortgage and that the subsequent mortgagees were entitled to the surplus funds. The judge also ordered the Royal Bank to pay costs of $4,000 to the law firm.
Geoffrey Stratton argued the case for Dale & Lessmann. He typically advises his clients to move any debt that might be secured by a mortgage and is not benefiting from a preferred rate to another financial institution. He also tells his clients to negotiate a better rate for any existing or future debts or lines of credit if they are going to be secured by the mortgage on their home.
In my own law practice, I find that homeowners are rarely aware of which debts are included in their mortgages and which are not. Banks often tack a secured line of credit on to the principal amount of the mortgage whether or not the consumer asks for it, and often, whether or not they are aware of it.
The problem with this practice is that when borrowers want a line of credit at a later date, they are unable to shop around for the best rates and terms because a line of credit is already registered on title.
Bob Aaron is a Toronto real estate lawyer. He can be reached by email at email@example.com, phone 416-364-9366 or fax 416-364-3818. Visit the column archives at http://aaron.ca/columns/toronto-star-index.htm for articles on this and other topics.