The mortgage acceleration clause is a provision in the mortgage loan contract that provides the lender with the legal right to demand repayment of the remaining balance of the loan under certain circumstances, usually when a contractual obligation is violated.
Typically, the circumstances that will trigger the acceleration clause are specifically spelled out in the mortgage document. Such circumstances may include failure to pay scheduled loan installments, sale of the house, title transfer, etc.
In the case of default, the contract usually allows for a grace period before the lender can call the loan and begin the foreclosure process.
From a property investment point of view the mortgage acceleration clause means that when the investor is exiting a property investment by selling the property there will be an immediate demand from the lender for repayment of the remaining balance of the loan. The mortgage acceleration clause falls under the general term of “demand features” that may be included in a mortgage document. The use of mortgage financing in many cases is necessary for achieving double-digit returns in property investing.
Property investors using mortgage financing need to examine carefully and understand completely any demand features that may be included in the mortgage document. Furthermore, they need to be on the lookout for a demand clause that may give to the lender the right to demand full repayment of the loan at any time for any reason. If such a clause exists, it makes the loan extremely risky for the investor and should not be accepted. The reason is that if such clause is exercised at any time by the lender, it will impose on the borrower an extreme burden and, as such, introduces a high degree of uncertainty in the cash-flow projections for the property that will be used as collateral for such a loan.
Comments