Collateral mortgages a hot topic
There has been a lot of interest in collateral mortgages since CBC’s Marketplace took a stab at TD Canada Trust’s product 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 or to access extra funds without re-negotiating. Collateral mortgage charges register loans at a certain percentage 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 thinks you will likely want to borrow more money in the future so it is establishing 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. Another reason is that it keeps customers from moving their mortgage business elsewhere.
There are pros and cons to collateral mortgages with the banks having the advantage. It’s an okay product for home-owners who want extra borrowing ability along with their mortgage but it’s not for everyone.
“Yes, home-owners 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,” said Steve Nipius, TMG’s Deal Centre Manager. “However, if a home-owner only has a 5% or 10% down payment, then it’s pointless to have a collateral charge.”
The cons may outweigh the pros. First of all, if a home-owner wants to switch to another lender, they are forced to pay legal and registration fees. More importantly, most banks won’t allow transfers because of the other loans tied to the collateral charge. This makes it harder to leave the lender since all your debt, if any, is under one agreement.
“Banks know there are costs involved to the borrower if they decide to move, so there no need to offer the best rates, “Steve said.
Also, consider this scenario: Your mortgage is in good standing but you default under a credit line with the same bank. The bank could start default proceedings under your mortgage, meaning you could lose the house.
However, 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.
But, if you want the freedom to move your business elsewhere, it’s not likely the best option. Collateral mortgages mean less choice and flexibility for consumers. 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.
Getting a standard or collateral charge mortgage is just another complication for many home buyers and owners. Get advice through your mortgage professional whose focus is on mortgages and who deals with a variety of lenders to get the best mortgage for your situation.
Thursday, January 31, 2013