The Suicide Clause
As a full-time Canadian real estate investor, we must be very aware of the types of mortgages that we take. During our time as an investor, we will do deals where we do not take the mortgage ourselves. In other words, we may joint venture with someone who does the qualifying. We will, however, be doing deals where we do have to get a mortgage.
The clause is worded differently from mortgage to mortgage, but essentially states that you cannot put a second mortgage behind the first or you are violating the terms of your mortgage and the lender has the right to “call” the mortgage…meaning you have to come up with all the money…fast!
This particular clause is vastly important to how you do business, how you can continue to finance properties, and how you can advise others in doing their business. Your mortgage broker, your lawyer, or your banker may have done you a great disservice by not scratching out this clause.
Could be disastrous
If you, as the real estate investor, decide to put a second mortgage behind any property that you have without knowing that you can do that (as according to your mortgage agreement), and you do that on a few properties as a way to pull out money on these properties, you could in fact be setting yourself up for a disaster, which may include a bankruptcy.
Forced to file bankruptcy
If economic times are tough, a bank may pull title on any of their clients who are holding more than three or four properties. ,They may see that there are second mortgages behind their first mortgage. Knowing those 2nd mortgages are technically breaking the terms of the 1st mortgage, they have the right to “call” all of their mortgages at once. This means that within 24 hours, you may have to sell those properties in order to pay back those funds, which will obviously be impossible. To resolve this, you may be forced to file for bankruptcy.
In the future, look at the mortgage documents that you are signing and be very aware of what we call the ‘suicide clause’. Get your mortgage broker, your banker, or your lawyer to scratch out the clause which will enable you to put a second mortgage behind the first mortgage. If the first mortgage lender will not let you do this, perhaps you should try another lender.
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