April 15th 2025
When it comes to lending money, especially in real estate transactions, understanding the differences between promissory notes and mortgages is crucial. In this second instalment of our legal newsletter, we will focus on the risks and advantages of different legal options for individuals to protect their interests.
In the first part of our newsletter, we considered that a promissory note is essentially an IOU from a borrower to the lender. By itself, a promissory note is not “secured”. Security refers to the underlying asset a borrower offers up to a lender as part of their promise to repay the loan. If the borrower defaults on the loan, the lender has the right to seize the asset and sell it to recover the owed amount. Without registering a mortgage against a property, a lender who is entitled to sue a borrower faces extra legal hurdles in recovering their money. Let’s take a look at mortgages in more detail before returning to the pros and cons of promissory notes.
Mortgages are secured by a property, meaning the lender will have a legal claim to the property if a borrower misses payments on the loan. This claim is typically the “power of sale”, which minimizes the risk of recovering funds by allowing the lender to take legal steps to sell the property. Anyone who lends money has the right to register a mortgage, not just the banks. However, legal advice specific to your situation is recommended, as most homeowners already have a mortgage, and the existing lender likely will not permit a secondary registration.
While mortgages offer more protection to lenders, promissory notes can be a convenient tool for smaller loans. The terms of the loan can be tailored to fit the needs of both parties, including interest rates and repayment timelines. However, parties who are considering creating their own terms for a promissory note must be aware of recent changes to Section 347 of the Criminal Code (Canada). It is criminal to charge an annualized percentage rate of 35% or greater for loans under $10,000. Legal advice is therefore always recommended for individuals who are borrowing or lending money.
In conclusion, both promissory notes and mortgages can play a role in protecting people who are considering lending money. Understanding the advantages and disadvantages of both options can help individuals make informed decisions. Whether lending to a family member or engaging in a formal real estate transaction, obtaining legal advice from a trusted legal professional will ensure a smooth and secure lending process. Liddiard Law is experienced in a variety of lending situations, so do not hesitate to reach out today!
michael@liddiardlaw.ca
Michael Liddiard
Liddiard Law Professional Corporation