|There has been a lot of interest in collateral mortgages since CBC’s Marketplace took a stab at banking fees on January 27, 2013.Up until a few years ago, most mortgages were registered as a standard charge mortgage. The major decisions were to opt for a fixed or a variable-rate mortgage and what term to select. In 2010 some banks switched to collateral charge mortgages. Traditionally, Home Equity Lines of Credit (HELOC) and revolving credit lines are considered collateral because they allow borrowers to readvance their loan, and to access extra funds without re-negotiating.
Collateral mortgage charges register loans at a certain percentage of the value of your property, up to 125%, regardless of the initial amount borrowed. If your home is valued at $250,000 and you borrowed $200,000, a mortgage could still be registered against your home for $312,500.
With a standard charge mortgage, you agree to how much you’re borrowing, the interest rate, and the term. So if your home is valued at $250,000 and you have $50,000 down, then your mortgage is $200,000. And with a standard charge your mortgage is registered at $200,000. If you wanted a line of credit, for example, you would have to reapply. With collateral mortgages, the bank establishes a global limit. The reasoning is that it will cost consumers less because there are no additional legal fees if the customer needs to refinance. There are pros and cons to collateral mortgages. It’s an okay product for homeowners who want extra borrowing ability along with their mortgage; however it’s not for everyone.
On the upside, qualified homeowners can refinance throughout the term without incurring legal costs as long as they’re not asking for a total loan greater than the collateral charge at the time of renewal or refinance. However, if a homeowner only has a 5% or 10% down payment, then it may not make sense to have a collateral charge.
On the downside, some lenders won’t allow transfers because of the other loans tied to the collateral charge, making it challenging to leave the lender since all debt, if any, is under one agreement. Most experts advise to shop around at the end of a mortgage term because you can save up to 0.5% on your interest rate, which can translate into substantial savings.
If you carry a lot of debt, require a re-advanceable loan and frequently need access to cash, a collateral mortgage will save you money in the amount of legal fees you are paying. If you want the freedom to move your business elsewhere, it’s not likely the best option.
Getting a standard or collateral charge mortgage is just another complication for many homebuyers and owners. My focus is on mortgages and I deal with a variety of lenders to get the best mortgage for your situation.
Guy Ward is a Mortgage Broker in Calgary, Alberta with TMG (The Mortgage Group Alberta).