Mortgage or Guarantee Trust: Which Suits the Lender?

It is among the first questions a new lender here asks, and it has no single answer. Both instruments work; they suit different files. Here is the comparison in the terms that matter to whoever is putting up the money.

The registered mortgage

The familiar option and by far the more common. The property stays in the borrower’s name and a lien is recorded against it in the lender’s favour, stating the amount and the terms. It sits on the folio at the National Registry where anyone can see it.

Its advantages are practical. It is quick to put in place, every attorney in the country has done one, and enforcement follows a route the courts travel daily. Being first in order of registration is what defines your position — where more than one lien exists, the order decides who gets paid.

Its limitation is equally well known: if enforcement is needed, it is a judicial process, and the timetable belongs to the court rather than to the parties.

The guarantee trust

A different structure. The property is transferred into a trust and a third party, the trustee, holds it under instructions agreed in writing at the outset: if the borrower performs, the property returns to them; if not, the trustee proceeds as the agreement provides.

The appeal is precisely that — the rules are settled at the beginning, between the parties, rather than worked out afterwards. How it plays out in practice depends heavily on how the agreement is drafted, and not all trusts are drafted alike.

The difference that actually matters shows up when a loan goes wrong. Enforcement under a trust follows the instructions written into it rather than a court’s timetable, which makes it materially faster than foreclosing on a mortgage.

That is the reason experienced lenders here often ask for a trust. It is not that the structure is more elaborate — it is that they have seen how long a foreclosure takes and would rather not sit through one.

What to read before accepting a trust

Since everything turns on drafting, five points deserve attention. Who the trustee is and what experience they have with this structure. What event triggers the instructions — how many days late, with what notice. How the property’s value is established if it has to be disposed of. What happens if the borrower contests it. And who pays the trustee’s fees over the life of the loan.

An agreement that answers all five clearly is a good one. An agreement that leaves them open shifts the uncertainty onto the lender, which is the opposite of what the instrument is supposed to do.

When each one fits

For many loans against a single residential property the mortgage settles it. It is familiar, quick to register and entirely predictable, and a great many sound files are written that way.

The trust earns its cost where a file has something particular about it: several properties, a project funded in stages against draws, more than one lender, or an ownership structure that makes direct registration awkward. In those situations, having the rules agreed in advance is worth the extra structure. Commercial and project files are where it comes up most.

What neither one fixes

This is the part worth remembering. Neither instrument improves a bad loan. If the amount sits too close to what the property is worth, or the repayment story at maturity is vague, no legal structure repairs it. Read the file first, then choose the instrument.

And in both cases the decision to enforce belongs to the lender — when to begin, which attorney, whether to negotiate first. A single late payment normally resolves long before any of that.

A separate question: the money at closing

Distinct from the security is how the funds are handled on the day. Where the lender is outside the country, the usual arrangement is to place the money with an escrow provider and release it at closing once everything is in order. That is covered separately here.

Which one experienced lenders ask for

There is a cost difference, and it is worth stating honestly rather than either exaggerating or hiding it. A trust carries a modest ongoing cost for the trustee across the life of the loan; a mortgage does not. It is small relative to the loan amount, and it is not the reason to choose one over the other — but you should see the figure for your own file before you decide, and we will set it out.

What decides it is the exit you want if the borrower stops paying. A lender who is content to go through the courts if it ever comes to that will be well served by a mortgage. A lender who wants the route agreed in advance, and wants it to move quickly, asks for a trust — and the longer someone has been lending here, the more likely they are to be in the second group.

What happens when the loan is repaid

Worth knowing before you start, since it is the ordinary ending. With a mortgage, the lien has to be formally cancelled at the Registry once the debt is paid. It does not disappear by itself, and an uncancelled lien on a repaid loan causes real problems for the owner later — it is also, from the other direction, exactly the kind of stale registration a lender occasionally finds sitting ahead of them on a new file.

With a trust, the property is returned to the borrower under the terms of the agreement. Either way the closing step is a step, and it belongs in the document from the beginning rather than being arranged in a hurry on the day the final payment lands.

Whichever structure is used, closing costs run to around 8% of the loan between legal fees and GAP’s fee, agreed before signing.

Article by Glenn Tellier (Founder of CRIE and Grupo Gap)