I’ve touched on collateral charge mortgages before in an earlier blog post. Since originally publishing the article there has been a fair bit more publicity on collateral charge mortgages when TD Canada Trust took heat for their collateral mortgages with this CBC Marketplace report.
Collateral charge mortgages are something consumers need to become more aware of. There is far more to consider than just rate when comparing mortgage options and it’s my hope that this post will shed a bit more light on what exactly a collateral charge mortgage is and how it can potentially cost borrowers in the long run.
What is a Collateral Charge Mortgage?
A collateral mortgage is loan attached to a promissory note and backed up by the collateral security of a mortgage on a property. Collateral mortgages aren’t new in Canada. In the past a collateral mortgage was used to register a homeowner’s secured line of credit (HELOC), allowing the balance of the loan to float up or down depending on the customer’s use. More recently some banks have been registering all mortgages as a collateral charge. TD Canada Trust & ING Direct are two examples.
Why do banks use Collateral Charge Mortgages?
One word, “RETENTION”. A Collateral Charge mortgage makes it easier for you to tap into their equity of your home if property values rise, although a collateral charge mortgage makes it somewhat more costly to switch your mortgage to another lender when your mortgage is up for renewal. This is because of the way the mortgage is registered.
Essentially you would incur legal fees if you want to switch out of a collateral mortgage. Thus making it less advantageous to switch to another lender.
What are the Pros & Cons of a Collateral Charge Mortgage?
While there is some positives with choosing a Collateral Charge lender I believe the Cons outweigh the Pros. When discussing your mortgage options you need understand the differences and think ahead to make sure it’s a good choice for your personal situation.
A Collateral Charge Mortgage might be for you if:
- Want a secured line of credit with your mortgage.
- There’s a high probability you’ll need to refinance during your term. Keep in mind mortgage rule changes has made it impossible to refinance above 80% LTV
- You don’t intend to shop around at maturity for a mortgage with better terms & rates. Switching lenders will incur legal fees even at maturity.
A Standard Charge would more suit your needs if:
- You don’t anticipate the need to refinance during your term.
- You like to shop at maturity for the best mortgage offerings from all other lenders.
- Don’t want to pay legal fees if you switch lenders (even at maturity)
Canadian Mortgage Hangout: Collateral Charge Mortgages
Earlier this year we tackled the topic of Collateral Charge Mortgages on Canadian Mortgage Hangout. Here’s the video from that episode.
Want to learn more?
If you would like more information on collateral and standard charge mortgages contact me anytime.