Collateral Charge Mortgages: The Good, The Bad and The Ugly. What you don’t know can cost you money.
Most people are unaware that there are two different types of mortgages available to Canadians, the more common “Standard Charge” mortgage and a “Collateral Charge” mortgage. Both types of mortgages have their advantages but it is important to understand the difference between them.
The difference between the two mortgages is how the lender registers the charge with the land registry office.
With a standard charge mortgage the lender will register your specific mortgage details (principal amount, interest rate, term, etc) and the standard charge is registered for the actual amount of the mortgage. At maturity this registered charge is transferable to another lender with minimal expense.
With a collateral charge mortgage the lender will register a charge for a greater amount than your original mortgage loan. This amount can be up to 125% of the value of the mortgaged property. What this does is gives the lender and borrower the ability to secure future loans with the property without having to register new charges. This collateral Charge is not transferable to another lender at the maturity of the mortgage term.
The Good – The benefit of a collateral charge mortgage is that you may be able to refinance your mortgage or borrow additional secured loans (line of credit or credit cards) in the future without having to register a new charge against the property. This will save time and expense for the borrower. It is important to note that the lender will still need to approve any additional loan based on the borrower’s financial situation at the time.
The Bad – The main negative of a collateral charge mortgage is that it is not transferable to another lending institution at maturity. If a borrower wants to change lenders at maturity for a better rate or better mortgage features they will incur legal fees to discharge the maturing mortgage and register a new mortgage with the new lender. These fees can range from $500 to $1000. For borrowers who want to keep their options at maturity and maintain negotiating power this is not the best mortgage.
The Ugly - There are other potential disadvantages related to collateral charge mortgages due to their structure that are important to understand.
As a homeowner you lose control of the equity in your home. Regardless of how much equity you have in the house the charge registered against the property can be up to 125% of the value of the home. No other lender will be willing to give you a 2nd mortgage or a secured line of credit using your house as collateral because the first lender controls all the equity. As long as the collateral mortgage is in place all secured lending will have to be done with the first lender. And if that lender declines a request for more money, which they have the right to do, you will have very few options.
All loans made under a collateral mortgage are interconnected and as a result may reduce your ability to shop your mortgage around at maturity. If you have a mortgage, a line of credit and possibly a secured credit card under one collateral charge mortgage, in order to move the mortgage portion you would need to pay off all debts in order to move the original mortgage to a new lender.
Collateral charge mortgages do have advantages, but unfortunately most are for the lending institution. It is important to be aware that a couple of the major banks now only offer collateral change mortgages.
As with any financial product make sure you understand the pros and cons of a collateral charge mortgage before entering into one. And if you have questions seek the advice of a professional who is looking out for your best interests.
Written by Jeff Dickson May 11, 2016 for Cornwall Wealth Management Group
Note: The opinions expressed here are Jeff Dickson’s. Cornwall Wealth Management Group/Manulife Securities Incorporated are not responsible for the accuracy of any of the information supplied here. All Bank related products are not offered through the Securities Dealer and are available by Referral only