If you are of a certain age, you may remember renting movies from video stores like BlockbusterVideo. For those of you weren’t born and raised in the video streaming world, the way it worked was you would 1) go into the store a pick out a movie or video game rental 2) pay for the rental (usually 1 or 2 days) 3) return the video in the store or use the mail slot by noon. If you were late, which happened to me occasionally, you were charged a late fee, which was $1.00 day. I remember getting upset with myself on being late – even if it was for a few hours. It wasn’t the amount of the late fee it was just the fact I lost track of time.
In residential real estate, a Buyer might be charged late interest, if the Cash to Close (Purchase Price, minus deposit and adjustments) was not paid on the Closing Date (also called the Possession Date). In the typical real estate purchase, the full Cash to Close must be provided to the Seller by 12 noon on the Closing Date. A Buyer cannot offer to provide a portion of the Cash to Close. It’s all or nothing. No money, no keys. In addition, (late) interest is charged to the Buyer.
Late interest may arise in a couple situations.
The most common reason is where the Buyers’ mortgage funds are delayed from their bank. Real estate transactions in Alberta close at 12:00 noon, to allow time for the Seller’s lawyer to pay out the Seller’s mortgage. Most banks will require payment by 2:00 p.m. If the Seller is late, the bank will charge interest each day to the next business day in which the mortgage is paid. So, if the real estate deal was intended to close on Friday, July 4th, but the Cash to Close wasnot provided, the Seller will continue to pay interest for Friday, Saturday, Sunday and Monday.
The other reason late interest arises is where a Buyer wants to use the proceeds from the sale of their own home, but their sale closes after their purchase. As an example, Buyer wants to buy Home A from the Seller on July 4th and use the sale proceeds of their own home (Home B), butthat sale closes on July 7th.
In either case, if the Seller agreed to allow possession on July 4, the Buyer would:
- Get all their ducks in a row, including having any of the cash to close not part of a mortgage;
- sign a Tenancy at Will Agreement; and,
- agree to pay late interest from July 4 to July 7.
How much is the interest?
The amount of interest depends on the amount of the Cash to Close. The customary rate charged in Medicine Hat is Alberta Treasury Branches Prime + 3%, as set out in Clause 10.10 b) of the Alberta Real Estate Association, standard Real Estate Purchase Contract.
As an example, on a house purchase costing $500,000.00 with interest at Prime 4.95% + 3%, the interest payment is approximately $109.00/day.
While this may not sound fair to the Buyer, keep in mind the following points:
- If the Seller has a mortgage, they are paying interest until they can pay it out.
- If the Buyer is paying interest on the Cash to Close, this means they are most likely not paying interest on their mortgage at the same time.
- The Buyer may receive the benefit of moving into the home on the Closing Date, which is useful because they may have booked time from work, paid for movers, etc. – in other words, late interest may be a small price to pay in the big picture.
As a Buyer, if you are concerned with the thought of paying late interest, the best plan is to avoid the rush. You need to give your Lender and Real Estate Lawyer reasonable time to complete the paperwork, meet with you to sign documents, and to process the request for funds. While more time is better, a request to close a deal with mortgage funds in less than a week, can be difficult.
If you are like me, you fret paying interest or late fees, even if the amount is low. In the case of residential real estate purchases, the amount of interest paid by the Buyer is not significant (in the overall scheme of things), and understanding the mechanics of why interest is charged can reduce some stress of not closing on time.
Les Scholly helps you navigate the turning points of life. He is a partner with Pritchard & Co. Law Firm, LLP and member of the Society of Trust and Estate Practitioners (STEP).
Contact Les at 403-527-4411 or at lscholly@pritchardandco.com
