A collateral charge mortgage has non-standard terms—usually an unspecified dollar amount registered on your property at Land Titles. In other words, your current equity and any future equity belongs to the lender on the terms they set.
A collateral charge also allows the lender to do things like change your interest rate, increase your loan amount and use your mortgage payment to pay down other debts you have with that lender if you are late on payments. Sometimes a collateral charge will be placed on all the properties you own, even the ones you thought were clear title.
Typically the lender will register as much as 125 per cent of the property value even though the amount may not have been advanced to you initially and allows the balance of the loan to float up or down depending on your use.
Since the collateral mortgage allows for the “re-advancing” of principal, like a revolving line of credit, the balance can rise, and very often does, with most people ignorant about the holes they are digging for themselves.
This is a product designed to lead you further into debt.
Effectively, collateral charges also allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing.
You could trigger an increase in the interest rate if you miss a payment.
This cannot happen with a traditional mortgage. The collateral mortgages are being registered with rates as high as prime + 10 per cent (regardless of what they initially offer you) and lenders can cover their potential losses by increasing the rates if they get a whiff of potential default.
When your mortgage comes up for renewal the bank can offer you whatever rate they choose and your only option, if you do not like the terms, is to pay legal fees to move the mortgage.
Sure, they will let you have access to more money but only if you qualify for the extra funds and if their qualifying criteria has changed you may not qualify.
As well, there is no guarantee of the rate you will be offered.
A collateral loan also involves other debt you may have and, under Canadian law, a lender may seize equity to cover other debt you have with the same lender. So, in essence, you’re securing all your loans including credit cards, lines, car loans, or overdraft that you may have with the bank which holds your collateral loan.
A normal, standard, conventional mortgage gives you the option to establish a set amount you are borrowing, the rate for the term you have chosen (say 2.99 per cent for a five-year fixed mortgage) and the amortization so you’ll know exactly when you will have the mortgage paid off.
You know what your payments will be for the term and if you stay on track the property is yours at the end of the amortization.
Should you need to borrow more using a second mortgage or by registering a home equity line of credit, you can.
If you don’t borrow any more money against the property, the principal balance on a conventional mortgage goes only one way: down.
Canadian major chartered banks will accept transfers of conventional mortgages from one to the other at little or no cost.
Beware the difference
It’s the classic case of buyer beware. All banks and credit unions offer the collateral mortgage. Some offer you a choice with a conventional mortgage, others do not.
Be sure you have the mortgage that is best suited to you and your lifestyle before you sign up.