What is a Collateral Mortgage?
What is a collateral mortgage?
We get asked this question A LOT! Everyone has heard this term, very few know what it means. Lots of people tell me they have seen the CBC Marketplace episode and they know that collateral charges are bad. The truth is that they are not good or bad, they just are. Collateral mortgages are only bad when you don’t know that you are getting one and then get caught by the fine print. They can also be great for people who need them and know how to use them. That is one of the many things we do for our clients, we access if a collateral charge mortgage is right for them.
What is it?
There are two types of mortgage charges that can be placed on the title of your home. One is a standard charge mortgage and one is a collateral charge mortgage. The standard charge is where the amount of mortgage money you are requesting is secured to the title of the home. A collateral charge is where multiple products are secured to the title of your home by the lender, this is usually a mortgage and a line of credit. The total charge on the home is readvanceable, this means as the client pays down their mortgage that dollar amount becomes available to them within their line of credit should they need it.
A collateral mortgage charge can save people a lot of time and stress when they need access to funds. If you have a collateral mortgage and you need access to money, the access will already be available to you on your line of credit. Where we see type of product to make the most sense is for new business owners that are using the equity in their home to start their business. They periodically need access to funds and this is a way for them to do that without having to jump through hoops of credit checks, appraisals and setting up a line of credit, it is already there for them. It is also good to know all collateral charges are not the same, they all have different fine print but, don't worry, it is our job to look through all that.
Several collateral mortgages carry a hefty amount of sneaky fine print with them. Many have extremely high prepayment penalties as you have to discharge a more complicated title charge, we have seen a standard charge mortgage typically at least $10 000 less to break than a collateral charge of the same value. As 60% of Canadians break their mortgage at 36 months, this is something that not enough people pay close attention to. A collateral charge is non-transferable, which means it can only be switched to certain lenders, even after you have fulfilled your 5 year contract term. This gives you less bargaining power to negotiate a great rate at the end of your term. Your own institution knows this and may use it to their advantage when offering you a renewal option to stay at the end of 5 years, we typically see these rates lower than the industry standard when people bring in their renewal letters.
There is both good and bad aspects to a collateral charge mortgage. We have lenders that offer both and we are happy to comb through all the options and see if this is a good option for you. We can assure you that if you need a collateral charge mortgage we will help select one with fine print that will suit you best.