What are the main characteristics of the ship mortgage?

The marine mortgage is a financing vehicle which has certain peculiarities and thus requires a good understanding of the legal rules which surround it.

Let us briefly remind some major principles common to all the types of hypothecs. The hypothec is a legal document which creates a security. The borrower will give as security the property (house, equipment, inventory, vessel) in consideration for the sums of money which the lender provides him with. The hypothec will usually specify the interest rate, the repayment terms, the term, the conditions of default, etc., so it creates rights and obligations between the lender and the borrower. Finally, the hypothec will generally be published in a governmental register so that third parties, potential purchasers, other lenders, etc., can know if charges affect the property in question.

These major principles also apply to the marine mortgage. The marine mortgage is, however, governed by a federal law as opposed to, for example, an immovable hypothec (mortgage) with which we are most familiar and which falls under the Quebec law. The marine mortgage presents thereby some specific characteristics that it is better to know. Let us note at first that the Canada Shipping Act, 2001 speaks about a vessel, but that we will use the expression "boat" for practical reasons in the text of this answer to the present question. Let us remind here that a marine mortgage can affect only a boat registered in the Canadian Register of Vessels, the owner of a boat so registered will see himself receiving a Certificate of Registry (also often referred to as the blue book of the boat).

Is the use of a marine mortgage necessary or desirable for all types of boats? No, only registered boats can be the subject of a marine mortgage, so the boats which are registered as pleasure crafts cannot be the subject of a marine mortgage.

Some boats, generally those for which the purchase cost is lower, can be the subject of an installment sales agreement (ISA). In such a case, the boat will remain the property of the lender until the purchaser has fully repaid the loan. This right will be published in the Register of personal and movable real rights, commonly called the RDPRM.

To obtain a marine mortgage under the Canada Shipping Act, 2001, and contrary to an immovable hypothec (also known as mortgage), the borrower must be already the owner of the boat to be able to mortgage it.

When we wish to grant a marine mortgage when acquiring a new or second-hand boat from a dealer, the financing is normally made in two phases. At first, the purchaser obtains a transitional loan (bridge loan) and obliges himself to sign a marine mortgage in favor of the lender as soon as the boat will be registered in his name. After the registration of the boat in the Canadian Register of Vessels, the borrower grants to the lender a marine mortgage.

Within the framework of a sale between individuals, the purchaser usually signs a mortgage promise for the boat which he intends to acquire. In this case, the lender will remit the agreed amount to a notary who will deposit it in his trust account, will proceed to the sale of the boat and will register the new owner in the Canadian Register of Vessels. Once the registration is published, the notary will receive the signatures of the parties to the marine mortgage, will verify if there are prior mortgages registered against the boat, will repay, where necessary, the previous creditors and will perform the cancellation of prior mortgages (if there was any) then will remit the funds held in trust to the seller. As we see, the intervention of your notary turns out here to be of great interest and provides an additional safety to the parties at each step of the transaction.

The marine mortgage must be published in the Canadian Register of Vessels so that third parties can be informed about charges affecting the boat in question. In the case of a registered boat, consultation of the Canadian Register of Vessels allows a purchaser or potential lender to know the mortgage situation of the boat which he wants to purchase or which we ask him to finance. These verifications can be made for you by a notary. Let us remind that there is no limitation as to the number of mortgage creditors who can be registered in the Canadian Register of Vessels.

For registered boats called to remain outside Canadian territorial waters (in bound), the marine mortgage is the most interesting financing vehicle for a lender. It will be registered in the Canadian Register of Vessels, it will thus be opposable against third parties, its rank will be established to the day, hour and minute of its registration, it can be the subject of cancellation when it will be repaid.

The marine mortgage can also turn out to be interesting for any purchaser because it will often take the form of a collateral security (revolving credit) which can be used for other purposes than the mere acquisition of a boat (personal loan, margin of credit, etc.). A fully paid boat, like a fully paid immovable property, can therefore provide to his owner an interesting leverage for other financial transactions.