Definition of Non-Recourse Loan
Virtually all mortgage loans require collateral, which usually comes in the form of a lender’s lien against the property itself. In a recourse loan, the lender can go after the borrower if the asset used as collateral does not pay off the debt owed. In a non-recourse loan, the lender is not allowed to go after the borrower, as the borrower is no longer personally liable for the debt if the asset used as collateral does not pay off the outstanding debt owed.
Why is this term important?
The collateral assures the lender that if the borrower defaults on the loan, that there is an asset of value that can be claimed and used to pay off the debt. However, in a non-recourse loan, if the lender were to take a piece of collateral (property), the lender could not seize anything else from the borrower due to the clause in the non-recourse loan. The lender cannot pursue further seizure of assets if the amount defaulted surpasses the initial agreed upon collateral. Consequently, a non-recourse debt will be limited to a certain percentage of loan to value ratio to confirm that the property used as collateral will be sufficient in the lender’s eyes.
Non-recourse loans are challenging to get from lenders. Those with high credit scores are more likely to be considered for this type of loan. Non-recourse loans have a higher interest rate due to the lack of personal liability, which is something to consider before making your decision.
Examples of term
In Canada, mortgages are typically recourse loans. However, in Alberta and Saskatchewan—non-recourse loans are more common. If you put less than a 20% down payment on your home, you would be required to have the CMHC insurance, which automatically makes your mortgage a recourse loan.
Walking out on a mortgage was made known in Alberta in the 1980s, and this act is called jingle mail. In the 1980s, credit bureaus such as Equifax and TransUnion did not have access to mortgage information, however, that is not the case now. To walk out on a non-recourse loan would result in a tonne of damage to your credit score.