Collateral Mortgage- What is it?
- Nearly all Chartered Banks and Credit Unions currently use this method of registering your mortgage.
- It is unlikely that you will be able to avoid a collateral charge mortgage if you have your mortgage with a Chartered Bank or a credit union.
- This is not necessarily the end of the world, you should not lose sleep over it provided you understand what a collateral charge is and means.
- Avoid having your mortgage with the same institution that you bank with, and have your credit cards, overdrafts, unsecured credit lines, car loans, etc. Yes, this goes against conventional wisdom and what mom and dad have taught us, but it is definitely worth consideration
- Only have your mortgage, and your mortgage alone with a bank or a Credit Union. Let this be your only relationship with that institution.
- Ask your broker for other options. There are lenders that do not register exclusively in this fashion, and there are lenders that give you an option to select.
The Financial Consumer Agency of Canada , on their website, defines a Collateral Charge in the following manner:
Collateral Charge (a.k.a ‘Credit-Master’ or ‘All-indebtedness’) – A type of mortgage whose features may include the ability to potentially borrow additional funds, subject to your lender’s approval, without the need to discharge your mortgage, register a new one and pay legal fees. If you want to switch your existing mortgage to a different lender at the end of your term, note that other lenders may not accept the transfer of your mortgage. This means you may need to pay fees to discharge your mortgage and register a new one in order to change lenders.
While it is certainly true, there are some benefits to a Collateral Charge, there is a bit more to it than this.
The (potential) benefit to the client is that there are no new legal fees for securing a line of credit or increasing the mortgage balance in the future. (assuming the choice was made to register the mortgage for either the ‘125% of the value‘ option or a maximum amount greater than the actual mortgage amount)
If, however, the client chooses to register their mortgage with a collateral charge lender for ONLY the mortgage amount then the upside moving forward is actually quite limited.
What to look out for as a client
The legal term for a collateral mortgage is an “all indebtedness mortgage” What this means is that it brings any other debts held by that specific lender under the umbrella of the registered security against he Real Estate. In other words co-signing a credit card or car loan for somebody (who then stops making payments) carries a risk of a foreclosure action against your property as a remedy for what was perceived to be an unrelated debt. Read that last sentence again. Yes your home is on the line for any other form of debt held by the same institution as your mortgage.
It is also (potentially) costly to transfer the mortgage to a new lender come renewal, in particular if the mortgage balance is under $200,000.
However the topic of transferring 2, 3, or even 5 years down the road is less pressing. I would suspect most readers are still wrapping their heads around the concept of a $5,000.00 Visa balance potentially triggering a foreclosure action – which it very well can.
(I have seen this occur on more than one occasion).
Transfer costs are becoming less of an issue as we currently have at least two lenders stepping up to offer a ‘no-fee switch’ program for collateral charge mortgages at renewal time. Still a limited choice to be sure but you have some options at your disposal.
Yes, this is a far reaching method of registration with serious ramifications. However, there may not be a way around registering your mortgage in this manner as nearly all institutions (most likely your current bank as well) now register in this fashion.
In my opinion, I think that you can take the following solution to protect your interests as a consumer.
Do not have all of your banking, credit cards, and small loans with the same institution as your mortgage. Rather splitting accounts between two separate institutions, and ideally having your mortgage held with a third financial institution is altogether more prudent. Think ‘Church & State’. Have your Mortgage with Lender A, consumer debt/trade lines with Lender B, and perhaps any Business accounts with Lender C.
If all your banking is done with Bank B, and the mortgage is placed with Bank A, we then eliminate exposure to the potential darkest side of the Collateral Charge Mortgage.
The Collateral Charge itself is not an evil thing, it is simply a policy that exists with nearly all Financial Institutions. It is designed to protect the interests of the Financial Institution over and above those of their clients. When you think about it, this is really what you should come to expect from a business, which is what the bank is after all. Once aware of these potential ramifications you can then structure your finances in such a way that the reach of a collateral charge is in fact quite limited.
Don’t expect lenders to change.
The case seems quite clear for a lender’s love of this type of registration. They are unlikely to change it anytime soon. It is far more likely that over the coming years, we will see even more lenders adopt this same policy.
More and more, lenders are being pressured to disclose the details around this topic more clearly. Below is an excerpt from the Department of Finance website
‘While many consumers continue to choose a traditional mortgage to secure their home loans, many are increasingly choosing collateral charge mortgages. The impacts of having a collateral charge mortgage may differ from traditional mortgages. For instance, switching between lenders may be more difficult. To make an informed choice, consumers need sufficient information to clearly understand the costs and consequences of collateral charge mortgages relative to traditional mortgages. The Government will require enhanced disclosure, better equipping borrowers to understand these impacts’
The Broker’s Point of View
- Concern for switching a client out to a new lender down the line, be it 3-5 years later, should not be the top 3 on the priority list for your broker.
- Priority #1 is always to place you with a lender whose programs and policies offer the greatest range of options over the long term (i.e. 10-15 years). This is my primary focus. Always. Clients best Interest First!
- This topic deserves a lot more consideration than it typically gets, especially during the initial stages of the mortgage planning phase. It deserves a few minutes to discuss!
Ultimately, Collateral Mortgage Charges are here to stay, understanding them and using that understanding to your benefit is your responsibility, and your Mortgage Brokers.