17 Oct 2011Blog

Mortgages: What you need to know about Mortgages in Barbados

by Savitri St. John, Partner, Clarke Gittens Farmer

Clarke_Gittens_Farmer_LogoGETTING STARTED

Investigate what you can afford

Whether you are planning to buy, build or both, first liaise with your bank to confirm what size loan you qualify for. You will have to give the bank a statement of your financial affairs, which it will review and advise what you can afford. This takes a few weeks.

You might want to shop around the banks as well, as they lend on different terms, some of which may suit you more than others.

Planning permission

If you plan to build or make renovations affecting the exterior of the building, you should next apply for planning permission from the Chief Town Planner, as it may take a while to be granted. You should have this in hand before formally applying for a loan.

Note: Find out more information on Town Planning applications, permissions and concerns in Barbados

Selecting a lawyer

Once you have decided on a property, have obtained planning permission for your plans, hire a good lawyer.

A lawyer experienced in land transactions is best. Ask the candidates about their experience in the area, and choose someone who answers your questions readily and clearly, and to whom your transaction will be a priority. You must be able to speak frankly to your lawyer without worrying about damaging your relationship with him or her, so think hard before choosing a friend or relative.

You need not hire someone who has worked for you before, even if they dealt with the same property. Shop around – you would for any other service. Ask for an estimate of the fees and expenses for the transaction. A good lawyer can provide you with a rough estimate, even this early on.

There is usually a savings on the fee if you use the same lawyer as the bank. Using one lawyer instead of two will also make things faster, but if you are concerned about a conflict occurring between your interests and those of the bank you might prefer to have your own independent lawyer, whose sole purpose is to protect you.

Should I purchase through a company?

You should make an early decision whether to purchase the property in the name of a company or in your own name, as this has a bearing on how all the documents are drafted. If your lawyer has to form a new company, it is even more important to decide early as this also takes a few weeks to do.

You must take tax advice from an accountant before making this decision. Bear in mind that keeping a company in good order takes maintenance and costs money:

  • A company owning property valued in excess of two million Barbados Dollars must file audited financial statements annually
  • The company’s records must be kept up to date, and there is a cost attached to doing so
  • The company must file corporation tax returns, even if these are nil returns
  • There may be some VAT liability on the part of the company – check with your lawyer
  • If you purchase through a company you cannot claim the interest payments on your mortgage as a tax deduction.

It would be wise to get your lawyer to estimate these costs for you early, so that you can weigh them against any tax savings your accountant may have said you will obtain by putting the property in a company. Usually, this is only a practical option for an investment property.

Commitment from your bank

Once you have formally applied for a loan, and it has been approved, the bank will issue you with a letter called a commitment or facility letter, outlining the terms and conditions of the loan. This is as important as the mortgage itself, as the latter is usually a generic document, which can be used to secure multiple loans, and the transaction specific parts of the deal are contained in the commitment letter.

Given its’ importance, you should read the commitment letter carefully and have your lawyer review it. You must understand clearly your obligations under the commitment letter in order to make the necessary preparations to fulfill them. You will not get your loan until you do.

Setting the stage for success

There are some basic steps you can take at the outset to ease the process:

  • Ensure your lawyer and banker have your full name, as it appears on your birth certificate. This helps them prepare accurate documents early, without corrections later on.
  • Let the bank and your lawyer know if you have not been living here for 3 continuous years, as Exchange Control permission may be required for both your purchase and mortgage, and the sooner this is known the better. Further, you may not be able to borrow locally if you are not resident for the requisite period. It is best to have the bank or your lawyer enquire of the Exchange Control Authority before committing yourself to a purchase, if you cannot bring in the total purchase price from overseas.
  • Before signing the agreement for sale, find out if the property is subject to any covenants which would prohibit your using it as planned. A breach of covenant can result in a lawsuit by the affected parties to bring the offending action to an end.
  • Check the town planning status of the property if you plan to change its use, as planning permission may be required. If it is, your agreement should be subject to the grant of that permission. Additionally, most town planning approvals have a life span of 5 years – so if you plan to use an existing permission check it is still valid.

Signing contracts

  • AGREEMENT FOR SALE

The agreement for sale sets out the terms and conditions of the sale of the property.

Before signing it, have the property inspected by an engineer, a plumber, an electrician and any other professional necessary so that you are satisfied it is in acceptable condition and suitable for the use to which you plan to put it. Once you sign the agreement for sale generally speaking you cannot raise issues about the condition of the property.

Have your lawyer review the agreement for sale before you sign it. It is signed in duplicate, and both copies are sent to the vendor’s lawyer, with the deposit (usually 10% of the price). The vendor signs the agreement and one copy is returned to your lawyer. At that point, both sides are committed to the sale and purchase.

You must insure any buildings on the property as soon as you sign the agreement for sale, as you must complete the purchase at full price even if the buildings are damaged or destroyed. You may take over the vendor’s insurance policy – ask to see it and consult with your broker and lawyer to decide if this is suitable for you.

  • BUILDING CONTRACT

A building contract sets out the terms and conditions on which a building will be constructed or renovated.

It should have plans and specifications attached which should be signed by both yourself and the contractor. You should not sign a document with any blank spaces except for the date of the document itself, and have your lawyer review this before signing it.

Try not to make changes to the works after signing the contract – this is the commonest cause of a shortfall in the funds needed to complete.

  • EXECUTION 

Ideally, the commitment letter, the agreement for sale and/or the building contract are signed simultaneously.

If you sign a sale agreement before you have a commitment from your bank, you risk losing any deposit you have paid if you cannot get the loan. Likewise, if you have paid a builder a deposit and do not have the money to complete the building, he will walk away from your job leaving you with an incomplete building.

ACCELERATING THE PROCESS

A large part of putting a mortgage in place is assembling and delivering various documents. If you take early steps to do this yourself, you can reduce the time it takes to complete.

Title Deeds

If you already own the land, you should have the original title deeds or the certificate of title, unless you have an existing mortgage, in which case they are probably with your current bank. The deeds or certificate are required to investigate the title to the property and ensure it is in order.

Possession of the original deeds is important because it is unlikely a bank will lend you money against your property without them, as if you default, the bank will not be able to sell the property to recover its loan.

You can accelerate your mortgage if you:

  • Ask the vendor for copies of all of the deeds and the plan of the land up front. The sooner you get these, the sooner the lawyers can start work.
  • Give the deeds, or copies of them, to your lawyer or bank as soon as you can. (Get a receipt that lists each document, and whether it is an original or a copy). Give your lawyer copies, even if you give the bank the originals.
  • If you are paying off an existing mortgage and getting a new one, obtain copies of your deeds from your releasing bank and give them to your lawyer or new bank. This takes a while, so start the process early.

If the deeds are lost tell your lawyer as soon as possible. There is a process for replacing them but it takes just under a year, so you must start as soon as you realize the deeds are lost.

If you are getting a second mortgage you must get the written consent of your current bank. This may take a while so ask for it early.

Check that the deeds vest the property in your name, and no-one else is included with you, or if they are, the bank is aware and your commitment letter addresses you both.

For example:

  • If the deeds are in both spouses’ names, but only one is borrowing, both must sign the mortgage and commitment letter. The spouse not borrowing should be given independent legal advice on the risks he or she is accepting before signing the mortgage.
  • Likewise, if the deeds are in only one spouse’s name, but both are borrowing, not only does the spouse who is not the landowner need to sign an occupier’s release and get independent legal advice, but they may in some cases have to sign a separate guarantee.
  • An occupier’s release postpones any interest that spouse may have in the property to the bank’s interest, so that the bank can sell the property to recover its loan without hindrance by the spouse. Once the bank is repaid, the spouse’s interest resumes as though no document was ever signed.

Other items

If you have any of the following items, deliver them to the bank or your lawyer as soon as possible. Give your lawyer copies if the originals are delivered to the bank. If you are purchasing property, ask the vendor to provide as many of these as he can as early as possible – most vendors will co-operate as they want the sale to close as quickly as possible.

  • Recent PLAN of the Property.
  • Up to date WATER BILL with no arrears.
    • Unpaid water rates are a first charge on land that will take priority to your interests and those of the bank.
  • LAND TAX BILL AND CERTIFICATE for the current year.
    • Unpaid land taxes are also a first charge on land and similarly take priority to your interests and those of the bank. A certificate is required, not just a receipt, which only deals with the year for which it was issued.
  • LIFE INSURANCE POLICY
    • Banks often require the assignment of a life insurance policy as part of the security for their loan. This benefits you also if you have dependents, as if you pass on, the bank will apply the insurance money to the loan and release the property to your dependents, who will not lose their home even if they cannot service a mortgage.
    • Before handing over the policy, check that:
      • The beneficiary on the policy is your estate. If it is a spouse or child, it creates a trust which takes precedence over the assignment.
      • Age is admitted on the policy. The insurer will not pay out under the policy if you die unless age has been admitted. Check with your agent to see this has been done. If not, you simply have to present your passport, birth certificate or national identification card to the agent.
      • There should be no loans on the policy. Check with your insurer – sometimes unpaid premiums are classified as loans to prevent the policy lapsing.
      • The policy should be in force and premiums should be paid up to date.

If your policy is assigned to your current bank, you will still be asked to sign the assignment form and your current bank will release the policy to your new bank when the loan is disbursed. If you are getting a new policy to satisfy the bank’s requirements, apply for it as soon as possible, as it may take weeks to obtain, given that doctor’s visits and blood tests are involved. Some banks attend to the assignment of the policy themselves, so check with the bank whether to give the policy directly to it or to your lawyer.

  • PROPERTY INSURANCE POLICY
    • If you do not already have a policy, apply for one as soon as possible, as it may take a few weeks to obtain.
    • Your bank’s interest as mortgagee must be noted on the policy which should be paid up and in force.
    • When negotiating your commitment letter with the bank, make sure you are not being asked to insure for a value that includes the land as even if you over-insure, you will only get the actual cost to re-build in the event of damage.
  • TOWN PLANNING DOCUMENTS (for all existing buildings or any proposed construction)
    • Buildings or significant renovations which affect the exterior of the buildings constructed without Town Planning permission may be subject to enforcement orders from the Chief Town Planner to correct or tear them down. If you have built or renovated without permission you may have to apply for a retention certificate which can take some time to be issued, and may not be granted, or may be granted subject to conditions you will have to fulfill.
    • If the buildings on the property were constructed in accordance with a valid planning permission you or the vendor should have a certificate of compliance which should be delivered to your lawyer, or to the bank, with a copy to your lawyer.
    • Where a building has existed for some time and there is no certificate of compliance, the practice is to obtain an affidavit from the owner testifying that there has been no development of the property within the last four years that would require planning permission, and that no enforcement notices are pending. The Town and Country Planning Act says where four years has elapsed since the development was carried out without permission, an enforcement notice cannot be served.
  • COMPANY DOCUMENTS 
    • If you are borrowing or purchasing through a company, give your lawyer and the bank copies of the incorporation documents for the company, including the general by-law, which governs how the company may act.

THE LEGAL WORK

After the agreement for sale is signed, your lawyer investigates the title to the property, to ensure you will get what the vendor promised to give you.

Your bank’s lawyer will also investigate title to make sure there are no reasons the bank could not easily sell the property to recover its loan if necessary. This takes place even if you already own the property, in which case your lawyer must prove to the bank’s lawyer that the title is good.

Searches

  • JUDGEMENT SEARCHES

Both lawyers search the Supreme Court Registry’s records to see if any judgments are registered against you, the vendor or any prior owner. If there are judgments, the lawyers also search for charging orders, which allow the property to be sold to satisfy the debt due under the judgment. A pre-existing charging order takes precedence over your interests and the bank’s mortgage.

Even if there is no charging order, if there is a judgment registered against you the bank may decide you are not a good credit risk, and refuse to lend, so if you do have a judgment registered against you disclose this and any arrangements you have to satisfy it early.

  • TITLE SEARCHES

Both lawyers search at the Land Registry to see whether there are any deeds or documents  other than those you or the vendor have produced relating to the property, like mortgages to be released, a sale or lease of part or the whole of the land, or grants of rights of way.

  • COMPANY SEARCHES

Where companies are involved, the lawyers also search at the Companies’ Registry to check that:

      • the company is still registered
      • there are no charges on the register affecting the property
      • the directors and officers on the register are those presented as directors and officers

Review of title

There are two systems of land title presently existing in Barbados. Most properties are governed by the Common Law System, but the new Registration System is slowly being introduced.

Under the COMMON LAW SYSTEM, lawyers trace title from owner to owner as far back as what is called “a good root of title” which must be at least 20 years old. This is usually a conveyance, but some other types of documents may be used as well.

The lawyers review all deeds up to the date of the good root of title, and all these deeds have to be in order – that is, properly drafted, and effecting the transactions they purport to effect. This may involve reviewing many deeds, or as few as one. Each property is different.

Problems sometimes encountered include incorrect property descriptions, missing deeds, unprobated estates, unreleased mortgages, or absent or unexpected rights of way.

The lawyers also review the draft conveyance (the document that will transfer the land to you,) and draft releases of existing mortgages to confirm that they are properly drafted.

Where the TITLE TO THE LAND IS REGISTERED, there should be no deeds, simply a certificate of title or charge, containing all the information about the title.

Even so, the lawyers review the certificate as they sometimes contain mistakes, and may reveal unexpected mortgages (called charges if the land title is registered) or rights of way.

On occasion there are things that should have been attended to when the land was brought under the registered system that were not done, and the lawyers must now attend to them in order to complete the transaction.

Title searches are still carried out, through an official search of the Register issued by the Registry. This takes about a week to obtain at best.

Requisitions

After reviewing the deeds or certificate the bank’s lawyers send your lawyer a series of questions about the property, called requisitions. Where you are buying a property these are for the most part sent on by your lawyer to the vendor’s lawyer.

Requisitions include specific questions about the title as a result of the review of the deeds or the  searches, including requests for deeds the lawyer has not seen which have a bearing on the title, rectifying deeds, death certificates, probate documents, releases etc.

General questions are also asked, such as whether anyone have a right to pass through the property, whether  Government plans to acquire part of the property, whether   any covenants in respect of the property have been complied with, and if anyone in connection with the transaction is an employer. (Unpaid NIS contributions due from an employer are now also a charge on land and in some cases take priority to the bank’s mortgage, so employers must produce NIS clearance certificates).

The bank also wants to know if there are any leases of the property, and if there are any adult occupiers of the property, or anyone who might have an interest in the property, whether by paying the mortgage or otherwise. If so, it will require a release from that person, in respect of which independent legal advice must be given.

Preparation of documents

The requisitions from the bank’s lawyer should usually be accompanied by all documents required by the bank, ready for your signature.

The documents involved include:

  • A Mortgage or Charge — which mortgages the land and contains the bank’s rights, including the right to sell to recover the loan, and sets out what you must do to keep your end of the bargain (including repaying the loan with interest).
  • A Release – which shows a previous loan has been repaid. Bear in mind that you have to pay the releasing bank’s lawyer’s fees and the expenses on the release.
  • A Conveyance – puts the property in your name.
  • Personal Guarantees – which set out the responsibilities of any person who will repay the loan if you do not. Independent legal advice should be given to the guarantor before a personal guarantee is signed.
  • An Occupier’s Release – by which a person who may have a right to occupy the property under the Family Law Act or otherwise agrees not to challenge the bank’s right to sell the property if the loan is not paid. Independent legal advice should be given before this is signed.
  • A Life Policy Assignment –  which transfers the policy to the bank for the life of the loan.

There may be also be other documents required.

It may sound pedantic, but you really should read all the documents before signing, and get your lawyer to explain them. There is little point in claiming after the fact that you did not understand what you signed, and you ought in any case to make sure the documents reflect your understanding of the agreements you have made.

Surveyor’s certificate/showing of line marks

When you are purchasing property you should have the line marks pointed out to you before completion. This is usually a condition in your agreement for sale. This should be done by a land surveyor as it is against the law for anyone else to do it, and a person who is not a surveyor may get the marks wrong. If you rely on what they tell you, you may later build in the wrong place.

Some banks also require their own independent land surveyor to check the boundaries of the property and issue a certificate that there are no encroachments, among other things. You will have to pay to have this done. The money is usually deducted from your loan. If this is the case, ask to have a copy of the certificate for your records.

Replies to requisitions

These are prepared by your lawyer after consultation with you, and sent to the bank’s lawyer. Where you are purchasing property, they will be based on replies by the vendor’s lawyer to your lawyer’s requisitions. The signed documents should be returned with the replies to the requisitions.

DISBURSEMENT

Once the bank’s lawyer has received all required documents, and everything is in order, he or she will update the searches and advise the bank that it may disburse the loan.

Disbursement takes place in different ways, depending on the circumstances:

Where there is a purchase of property

  • The vendor’s and/or your lawyer hand over the documents to the bank’s lawyer in exchange for a cheque for the net loan proceeds payable to your lawyer.
  • Because the bank’s lawyers have to record the documents at the Registry, and must pay all taxes and duties on them first, the loan proceeds are usually net of vendor’s expenses payable on recording, such as property transfer tax and stamp duty on the conveyance, and of stamp duty on any releases to be given by the vendor. Your lawyer in turn will make his or her cheque to the vendor’s lawyer net of these vendor’s expenses.
  • The loan proceeds are also net of your expenses such as stamp duty on the mortgage and the bank’s lawyer’s fees.
  • The vendor’s lawyer also hands over the keys to the property to your lawyer as well as letters which transfer the utilities.

If you are mortgaging property already owned, and not currently mortgaged

  • Your lawyer can send all the documents to the bank’s lawyer “in escrow”, which means the bank’s lawyer cannot deal with them until the loan is disbursed. Some lawyers prefer not to do this but it does save time.
  • The bank’s lawyer then sends your lawyer the cheque for the loan, net of all expenses of putting the mortgage in place and the bank’s lawyer’s fees.
  • Your lawyer may settle his fees and expenses from these funds before paying the balance to you.
  • If your loan is a bridging loan, all the bank may disburse at the outset are the fees and expenses needed to put the mortgage in place. Other disbursements will be made when you present certificates from your architect or Q.S. certifying the stage of construction your building has reached.

If you are paying off a former mortgage

  • The bank’s lawyer will hand over a cheque for the amount to pay off the previous loan to the lawyer for the releasing bank in exchange for the release.
  • Any documents held by your lawyer or the releasing bank’s lawyer are handed over to the new bank’s lawyer at the same time.

FEES AND EXPENSES

The fees and expenses you will have to pay include (1) Bank Charges (2) Fees for both your lawyer and the bank’s lawyer, and (3) fees for the releasing bank’s lawyer. All of the fees and charges will probably be subject to VAT.

Government’s taxes and duties must also be paid, including:

  • Stamp duty on the mortgage ($3 for every $500 or part thereof of the amount borrowed)
  • Recording fees on the mortgage, usually about $120.00
  • Stamp duty on any life policy assignment ( $2 for every $1000.00 or part thereof of the policy amount)
  • Stamp duty on any release ($1 for every $500.00 or part thereof originally borrowed)
  • Recording  the release  – about $20.00
  • Stamp duty on any personal guarantees – about $100 in most cases
  • Various search fees – usually under $100 in total.

Documents under the registered system are registered and not recorded, and those fees are calculated on a scale based on the improved value on the land tax bill.

When budgeting, keep in mind expenses such as insurances to be obtained (including mortgage indemnity insurance,) valuer’s fees etc.

RECORDING DOCUMENTS

After disbursement, the taxes and duties are paid by the bank’s lawyer, and the mortgage and any conveyance and release are recorded or registered at the Land Registry. This takes about 2 months, longer if a company is involved.

The duties on any guarantees and/or life policy assignments are also paid by the bank’s lawyer, and copies of all life policy assignments are sent to the insurer so that it can note the bank’s interest on the policy.

Once the deeds are returned to the bank’s lawyer by the Land Registry, they are sent to the bank to be retained during the life of the loan.

RELEASE

After you pay off your loan the bank will release the mortgage. You must contact your lawyer to have this done, as the release must be prepared, stamped and recorded.

At that stage the original deeds and documents are returned to you and should be kept safely until you wish to deal with the property again.

Clarke Gittens Farmer is a commercial law firm, providing legal services for both domestic and international corporate and private clients. The firm has a reputation for high quality work in property, banking, corporate, commercial and business law areas. The firm is the Barbados member of Lex Mundi, the world’s leading association of independent law firms.
The information provided in this article is not comprehensive and is not intended to constitute professional legal advice.
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