What is a collateral mortgage?
First of all, when you obtain a mortgage, you have to put up security, usually a property. A charge is put against the title of your property. The type of charge can be collateral, or standard. Most people refer to the standard charge as a “conventional” mortgage.
So, what is a collateral charge, and how does it differ from a “regular” or “traditional” charge?
As mentioned already, when registering a mortgage, there are 2 ways that they can be registered in Canada.
- a standard charge and
- a collateral charge.
The standard charge is fairly straight forward.
The main difference between the two charges is that you have the ability to re-advance on a collateral charge back up to the (or even up to a certain amount over) originally registered amount.
The most important question is, what does this mean to a borrower? Let’s take a closer look with an illustration.
Let’s assume that your house is worth $500,000, you have 20 percent equity and therefore a mortgage of $400,000 ($100,000 of equity in the property). Traditionally, as you pay down that mortgage, with a conventional mortgage, your balance will go down, and you are unable to re-advance at all. Think of a car loan, as you pay it down, the loan balance goes down, and the car will become “yours” once the loan balance reaches zero.
A collateral charge, however, allows the lender to register the mortgage for a figure above and beyond the value of the home, perhaps the value of the home plus 25 percent on top of this.
Note, this is not the mortgage, but the value of the home plus 25 percent (or more in certain cases). Some institutions, such as Scotiabank, don’t even specify a limit.
Now, there are a couple of reasons why institutions do this.
The institution will tell you that it is a convenience for the client because, in a couple of years, after you have paid down say, $50,000 of your mortgage, you will be able to go back to the bank. Your mortgage balance is now $350,000, and you want to renovate your house, so you need $50,000. Well, rather than having to break the term and pay legal fees and incur costs, you will be able to now just borrow back up to the $400,000. You may actually be able to borrow beyond this amount, as it is likely that your home has increased in value over the last 2 years as well. So, you could borrow beyond that, based on how much they registered the mortgage for.
While it does seem very convenient at first glance, the reality is it is also a well disguised way of the lender to tie you in with them. I say that it is well disguised because this part, they don’t actually tell you about you.
Once you are tied into a collateral mortgage charge with one lender, the legal registration is only valid for them. If you want to switch your mortgage after your mortgage term is up, you can still do so, however you will have to pay legal fees all over again to register a new charge for the new lender. Now, this is not the end of the world, the legal fees are only around $1,000. What most of the people that we speak with when we have to deliver this news to them are upset about is that they were not aware of this, nobody had explained this to them.
This is what we at themortgagespecialist.com strive to do, is educate you in order for you to make an informed decision related not only to your mortgage, but your overall financial wellness.
If you have carried a mortgage for longer than one term, you are well aware that your current lender rarely, if ever comes back to you with an offer at renewal that is competitive.
So if you are thinking you can just move your mortgage at renewal if they don’t offer you their best rates, and that you are going to shop your mortgage at the end of your five-year term, while you can certainly still do so, you may need to prepare to have to pay for legal fees for switch to a new lender if you have a registered collateral mortgage.
Many lenders only offer Collateral Charge mortgages. TD bank and most of the Credit Unions in BC offer only collateral mortgages.
This is not to say that a collateral mortgage is bad, and that you should only stick with a conventional mortgage. In many instances, the collateral mortgage can be the only option, and it can be very useful. What is important is that you, as a consumer be aware of what you are signing.
This is our biggest concern here at themortgagespecialist.com, hearing from so many people that tell us that they are not even aware of the difference in charges,
It is another reason why you should consider using an independent Mortgage Professional who will look out for you and your interests.
There are other aspects of a collateral mortgage that you should also be aware of. You can find some more details here in this article, or you can simply reach out to us if you have any questions about collateral mortgages, or any other mortgage questions for that matter.
I’m Aleem Peermohamed Mortgage Specialist Vancouver and I am here to help.
- Note: This post on collateral mortgage vs conventional mortgage was originally inspired by a conversation I had with a client that was referred over to me for a mortgage switch or transfer, which is typically a pretty simple and seamless transaction, with no legal fees or any additional expenses incurred on the part of the borrower….in most cases….
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