Collateral Mortgages Explained
As the spring market heats up for all the homebuyers, lenders and homeowners who have mortgages soon coming up for renewal; I would say it’s a good time to remind all to read the fine print on any and every contract put in front of you. If you don’t understand something, you need to ask the questions. My mom always told me the devil is in the details and as the mortgage interest rates continue to stay at all time lows, do be aware of exactly what you are getting into when borrowing and/or paying down the largest debt most of us will ever have in our lifetimes.
Over the years I have been approached by a number of good people just looking to get the best mortgage rate available without being fully aware of all the little details that come with the various mortgage products out there. Sadly, I have learned that if these nice people do not ask the right questions, they simply don’t know what they don’t know because no one took the time to tell them what they should know!
Having said that, do you know the difference between a collateral charge mortgage and a standard charge mortgage? One of the differences is a collateral mortgage is the only option with a couple of lenders versus the standard charge mortgage that all of the rest of the lenders offer, although some offer both. We all know about the standard mortgage charge that has been the norm for the past, read on for the details of a collateral mortgage charge.
The basic workings of a collateral mortgage is the lender has both a promissory note AND security in the form of a lien registered against the property for the total amount registered. This registered amount can be as high as 125% of the property value even though the borrower did not receive all of those mortgage funds. These aren’t new in Canada as typically a collateral mortgage is registered for a secured line of credit, allowing the balance of the loan to float up or down depending on the customers use, but they are fairly new in the mortgage realm.
How does this affect you? Let me count the ways as it’s important to understand the differences between the two as well as the pros and cons so you can make sure you get the mortgage that best fits your long-term goals.
I would say the biggest downside of the collateral charge comes at the renewal date. For consumers who want to keep their options open at maturity and have negotiating power with their lender, this isn’t the best product for you as collateral charge mortgages are difficult to transfer to a new lender for a better rate. This means you can’t “switch” for free like you can with regular standard charge mortgages as they basically have to start at the beginning and pay new legal fees and appraisal fees which could total upwards of $1,500. And now with the recent government mandated changes, refinances can only be done up to 80% of the value, so if you put down only 5% when you originally bought your home, you are stuck with that current collateral charge mortgage until you pay down your mortgage from 95% of the value to 80% of the value if real estate prices remain flat. And the question again is; if you are unable to switch lenders, do you comfortably trust your lender to give you the best possible interest rate.
The ability to take out equity is one of the primary features of Home Equity Lines of Credit which are secured by collateral charges for this reason. If you feel there is a good chance you will refinance down the road to extract equity, then a collateral charge mortgage may be a wise choice for you.
If your goal is to pay off your mortgage as quickly as possible then a regular standard charge mortgage will suit you just fine. It will allow you the opportunity to move the “existing balance” to another lender at renewal should you want to without incurring legal and appraisal fees or simply not being able too due to a high loan to value. In other words, it’s easier for you to keep your options open.
Deciding whether to get a standard or collateral mortgage adds another layer of complication for homebuyers and owners. Before signing off on any mortgage offering, make sure you are getting advice from a true “professional” who truly understands the complexity of mortgages and can help you to make an informed decision on what options are right for your particular situation. Ask the hard questions to ensure there is less chance of regretting your choices at some future date.
There’s always more to the conversation about collateral mortgages, this is not an in-depth analysis of them, just a brief overview to get the conversation about collateral mortgages started.