Collateral Mortgages, and Why you need to be Careful!
Most mortgage borrowers don’t know what a collateral mortgage is. When a lender registers your mortgage they can either register it as a “Collateral charge” or a “Conventional Mortgage Charge”. There are several lender’s who have done Collateral only mortgages for the last 8+ years so you may very well be in a collateral mortgage without knowing it. So what does this mean to you?
1.something pledged as security for repayment of a loan, to be forfeited in the event of a default.
synonyms: security, surety, guarantee, guaranty, insurance, indemnity, indemnification; backing
“she put up her house as collateral for the loan”
The definition of collateral is self explanatory, however the way it works in mortgage lending is a more of a “Readvanceable Loan”. Let me explain the difference between Collateral and Conventional.
The most standard of mortgage types, a conventional mortgage is when your lender registers the exact amount you borrowed.
A collateral mortgage is sold as a “Readvanceable Mortgage Loan”, which means when the lender registers your mortgage, it is for more money then you actually borrowed at the time of closing. This means that as your property increases in value, you can borrow more money without having to do a full “Refinance” application. The intention of this product is to save clients time and money. The collateral charge mortgage does make sense for some borrowers, but that percentage is very small, not everyone needs nor wants to borrow more money against their property, let alone with the same lender.
- • Flexibility to borrow more money against your home in the future
- • Ability to save on fee’s and legal costs associated with refinancing
- • The Cost of paying legal fee’s if you chose to switch to a different lender (even if your term is over).
- • Prevent’s you from obtaining a better rate from a different lender due to costs of breaking Collateral Charge Mortgages (even at term end)
- • On paper, it could appear like you have much greater amounts of debt than you actually do (larger amount registered than actually borrowed).
- • Potentially traps you to that lender, making it impossible to borrow additional funds (in any form) from other establishments due to the “readvanceable” amount showing on your credit reports.
All mortgage products have their place in the lending industry and fit with the right borrower. If you know you are purchasing a home that will need a lot of renovations in a short period of time, it may be wise for you to seek a Collateral Mortgage.
However, in my opinion, there are so many other options available to customers, from personal loans, to HELOC’s, Refinances, and Second Mortgages, that a Collateral Charge mortgage is not usually the best option and clients need to be wary of signing with lender’s who do Collateral Charge Mortgage’s only! Collateral Charge Mortgage’s are a great business move on lenders parts as it forces clients to stay with that establishment and borrow from them as they have already “pre-approved” that extra funding.
At this time, many lenders offer both Conventional and Collateral Charge Mortgages as an option to their clients, however there are a few banks who currently ONLY offer Collateral charge mortgages, these lenders are TD, Tangerine (Nee: ING), and National Bank.
If you have any questions, would like to discuss your existing mortgage, or get pre-approved, please contact me any time.