August 26, 2015
Collateral mortgages are starting to get some bad press – see for example a recent CBC article.
Not a lot of people know what these are and not all lenders use them. Scotiabank (on their STEP program), TD and NBC are 3 of the most high profile who do. TD and NBC register all mortgages as collateral, whilst Scotiabank only those on their STEP program.
These are different to ‘normal’ mortgages in that the legal registration is different. They are supposed to allow more flexibility in repayment terms and products secured by a residential property. Essentially, when used correctly, they allow you to access the equity in your home more easily. This is why Scotiabank offers them under their STEP program – as usually it includes a Home Equity Line Of Credit (HELOC).
However, there are significant negatives to collateral mortgages. Normally, when a 5 year mortgage (or any other term) comes due, or is up for renewal, you can switch/transfer their mortgage to another lender at no cost. This is using the ‘normal’ type of mortgage where the mortgage is registered against the title of the property with the amortization outlined, so another lender simply pays out the other mortgage and continues on with the same amortization and balance as the previous lender had in place.
Under a collateral mortgage however, when the mortgage comes up for renewal, it would actually have to be discharged before another lender could take over the mortgage. This means a lawyer must discharge one mortgage and register a new one, which can result in fees ranging from $500 to $1,000. Not only would it be subject to legal fees, but all secured debt would have to be paid out with the mortgage, including secured credit cards and home equity lines of credit.
Now this is no longer a renewal but a refinance and, since the new Conservative Government limits were passed, refinances are limited to 80% of your home’s value. So, if your renewal is for more than 80% of the home’s value, you can’t move your mortgage to a new lender.
This is why some lenders use a collateral mortgage! Basically you can end up stuck with them and either facing legal costs to move the mortgage or being unable to move it at all. Even worse, as CBC’s Marketplace discovered, some lenders fail to mention this at all when you are getting a mortgage.
It’s things like this that really highlight the value in a mortgage broker. Make sure before you sign any mortgage that you find out if it is a collateral mortgage or not – and you need to consider the down-sides to this before signing.