When you are buying a house or shopping around at mortgage renewal time, it is important to read the fine print on the mortgage approval and how it is registered.
It is important to ask questions and, if you don’t understand something, make sure that it is explained so you are comfortable throughout the entire process. Don’t just sign the documents and move on. Before you sign on any mortgage offering, make sure you get advice from a mortgage expert who truly understands the complexity of mortgages.
Most people focus on getting the lowest interest rate but forget to focus on the overall mortgage that provides not only a great interest rate but favorable terms and options. By asking questions you will ensure that you are making the right choice and has less chance of paying unnecessary costs down the road.
One of the important questions you need to ask is how is the mortgage registered. Is it registered as a collateral charge or a conventional (standard) charge?
Some lenders register all their mortgages collateral, while others will give you the option only after you ask but most of them register their mortgages conventional. With a conventional mortgage, the amount you are borrowing (property value minus down payment) is the amount that’s registered. But with a collateral mortgage, the amount that's registered is 125-150 per cent of the property value, and the lender has both a promissory note and a lien registered against the property for the total registered amount.
For example, if your mortgage amount is $300,000, the lender will register $300,000 plus up to another $150,000 even though the borrower didn’t receive all of those mortgage funds.
Collateral mortgages have been around for a while and are used when you have a home equity line of credit (HELOC or secured line of credit), which allows the balance of the loan to float up or down depending on the use by the borrower, but they are newer when it comes to mortgage products only. Bank such as Bank of Montreal, CIBC and most credit unions such as Vancity register their mortgages collateral while TD Canada Trust and Tangerine (ING Direct) switched to collateral mortgages in 2010.
The advantage of a collateral mortgage is easy access to credit. Since the mortgage is already registered for a larger amount than you need to buy the house, you can access additional funds in the future without any extra steps or legal fees.
This is only beneficial if you are putting more than 20 per cent in as a down payment and as long as you maintain 20 per cent equity in your home, as you can only borrow up to 80 per cent of your property’s value as per the government regulations. If you are buying a home with less than 20 per cent down payment, it wouldn’t make sense to have your mortgage registered collateral as you won’t be able to refinance until you have at least 20 per cent equity in your home.
There are also several downsides of collateral mortgages:
- Free transfers or switches to a new lender when your term is up aren’t usually available. Most other lenders don’t like the fine print and restrictions of collateral mortgages and won’t accept them unless you are refinancing, which costs you legal and possible appraisal fees.
- You could end up paying a higher interest rate at renewal. If your collateral mortgage makes it difficult to switch lenders at renewal, you don’t have the ability to shop around for the best rate. That could end up costing you more on your mortgage rate.
If your goal is to pay off your mortgage faster then a conventional charge mortgage will suit you better. It will give you the option to move the existing balance to another lender at renewal time, without having to incur any legal and appraisal cost. It is important to leave your options open.
Obviously, it’s very important for you to know up front whether you are getting into a collateral mortgage or a conventional mortgage. Unfortunately, many people don’t realize they have a collateral mortgage until it comes time to renew and they don’t have the flexibility they need.
By understanding the difference you can make sure you get the mortgage that best fits your long term goals. Speak to professional mortgage experts to get the best mortgage and have every detail of the mortgage approval explained, so you are informed and happy with the decisions you make.