A collateral mortgage can trap you: Roseman
You may want to change lenders at the end of a mortgage term. But with a collateral mortgage, your freedom to move will be constrained.
Your residential mortgage is coming up for renewal. Your lender won’t match the competition, so you decide to get a better rate elsewhere.
Moving a mortgage at the end of a three-year or five-year term is no big deal. The new provider usually covers any transfer fees.
But switching is more costly if you have a collateral mortgage. You must hire a lawyer and pay about $1,000 to discharge the mortgage before you can move to a new lender.
Since 2010, TD Canada Trust has sold only collateral mortgages. Tangerine Bank (formerly ING Direct) changed to collateral mortgages in 2011. National Bank also offers them.
Having a collateral mortgage affects your ability to transfer your mortgage to a new lender and your ability to borrow additional funds. It can also affect your ability to discharge the mortgage after repaying the loan in full.
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Many people don’t know the difference between a conventional and a collateral mortgage, since the information is buried in the fine print of a detailed agreement.
Last August federal Finance Minister Joe Oliver announced an agreement with eight major banks, under which they would voluntarily disclose general information about collateral mortgages at their websites by Sept. 1, 2014, and in their branches by Nov. 30, 2014.
Finally, the banks would provide specific information to consumers who were entering into a new mortgage agreement by Jan. 31, 2015.
Has voluntary disclosure worked? I found almost nothing when checking the banks’ websites. But the Canadian Bankers Association’s website has an article, “Mortgage Security,” to which individual members can provide links.
With a conventional charge, only the amount of the actual mortgage loan is registered against your home. If you borrow $250,000, the lender will register a $250,000 amount as a liability on your property.
With a collateral charge, an amount higher than the actual mortgage loan may be registered against your home. If you borrow $250,000, the lender can choose to register a $300,000 or $400,000 amount.
This allows you to get an extra $50,000 to $100,000 at a later date, secured by the mortgage, without having to discharge the loan and go through a costly refinancing. However, you must meet certain conditions in order to borrow more money.
“You will need to apply and be approved by the lender for the increased amount, based on the current criteria of the lender, your ability to repay the mortgage loan and verification that your home’s value supports the mortgage loan request,” says the CBA.
Dan Faubert, an Ottawa mortgage broker, wrote a blog post last August about the pitfalls of a collateral mortgage. He used the example of John Smith (not his real name), who was denied a loan to fix up his home.
The man owned a home worth $375,000. He had $25,000 left on his mortgage and a $250,000 balance on his home equity line of credit — a total debt of $275,000.
Unfortunately, he didn’t know the bank had registered a $375,000 mortgage against his home. Most collateral mortgages are registered at 100 per cent of the property’s value and some go up to 125 per cent, depending on the lender.
Smith wanted $25,000 to renovate. He was planning to sell his house. But since he was retired and had a lower income than when he borrowed the money, he didn’t qualify for a bank loan.
Faubert couldn’t get him any more money, nor could any other mortgage broker, since the collateral mortgage was registered for 100 per cent of the property’s value.
Smith had borrowed $275,000 and his home was worth $375,000, but there was no equity against which to register a mortgage. It is a dilemma that could face other Canadians who carry a mortgage with them into retirement.
“Any mortgage with any bank that has multiple products in one mortgage is also registered as a collateral mortgage,” says Faubert, who recommends asking lenders for an explanation before agreeing to new financing.
I predict the trend to collateral mortgages will spread. Banks benefit by making it more difficult — or impossible, in some cases — to switch lenders before a mortgage is discharged.
Oliver should check the banks’ voluntary disclosure under the agreement announced last year. Customers need to know in clear terms, explained by a real person and not just in fine print, about a key change to the standard mortgage contract.