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The origin of mortgages.

Added: Aug 02, 2017
Category: Understanding Mortages by Laird Scott

The Mortgage Loan Agreement

The most financially onerous document that most of us will have to sign in our lives is a mortgage loan to finance the acquisition of a home.  Yet, how many of us understand how this document has evolved over the years since it first came into being in Europe in the Middle Ages?

In England upon which Ontario law is based, the first bank was established in 1694.  In Scotland, upon which Quebec law is more loosely based, the first bank was established a year later in 1695.

Both banks provided short term loans to finance the working requirements of its needy customers engaged in the import and exports to the new and rapidly expanding empire.  These needs were met by establishing import and export letters of credit, and soon a third bank appeared in the scene – the British Linen Company.  As its name suggests, this bank was also primarily engaged in the import of goods from the colonies – and the emerging states of America – and soon changed its name to the British Linen Bank.

The need for longer term financing to finance longer term investment soon became apparent, and the creation of loans secured by real estate evolved, enabling borrowers to pledge assets in their home market to finance the creation of assets overseas. This was achieved through a legal mechanism which allowed the lender (or
“mortgagee”) to take possession and sell the secured property pledged as security by the borrower (or mortgagor”).

The Mortgagee or lender would typically be a bank or other institution with “excess” capital which it can afford to loan to third parties in search of capital to fin ace their business.

In most jurisdictions, these loans were secured by the pledge of real estate assets or other assets (such as gold), which could be reasonably be relied on to maintain their value.  Such prudence was not always followed, and every ten years or so in England, banking failures become quite common.  It was this phenomenon which prompted the English Parliament to change the role of the Bank of England from that of a commercial bank to that of “Lender of Last Resort”.  This privilege did not extend to the Scottish banks which in comparison with the English banks had a remarkably trouble – free history.  In exchange for providing
this back-stop, the English banks were limited by law in the amount of bank notes that they could issue to fund their loans.  A Bill was introduced to include the Scottish banks in such restrictions, but the Scottish banks took umbrage at being compared with their English counterparts and a letter campaign led by  Sir Walter Scott, (under the pen mane of Malachi Malagrother), was fortunately successful and this Bill was dropped.

As the years passed, and taking mortgages became more and more common as means of financing,
it became obvious that as more and more mortgages were taken the volume of legal documents evidencing the transfer of title became onerous.  Every time a mortgage was created, the solicitors acting for the mortgee had to peruse each successive mortgage document to confirm that title was correctly described.  In England, the Land Titles Act introduced the concept of real estate being Registered and mortgage documents being
uniform in content and format.  This registered Title Deed became the base document upon which all future purchases and sales would be recorded.  All that was required to evidence Title was a properly executed Deed of Transfer.  Transfer of title documents which in the past could have taken several weeks can now be done in hours.

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The above is the first in a series of articles we thought might be of interest.   We will be getting into more technical issues, evaluating financing options and the different ways a mortgage can work for you as an investment tool.   Often a second home, like a vacation rental, is highly leveraged.  We hope that our series of articles will help to educate and create a better understanding so that you can make it work for you.   When you are considering a vacation rental by owner or perhaps hiring a vacation rental manager, knowing how it impacts you financially is an important part of ensuring that purchasing a vacation rental is a $mart idea!



 



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