Of Prime Interest: Understand your mortgage options
So what exactly is a collateral mortgage?
A collateral charge mortgage has non-standard terms—usually an unspecified dollar amount registered on the property.
So 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.
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 the principal, like a revolving line of credit, the balance can and very often does rise, with most people ignorant about the debt hole they are digging for themselves.
This is a product designed to lead you further and further into debt.
Effectively, collateral charges also allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing.
All you’ll likely have to do to trigger an increase in interest rate is miss a payment.
In comparison, this scenario can’t happen with a traditional mortgage.
The collateral mortgages are being registered with rates as high as prime plus 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.
If you don’t like that option, you must pay significant legal fees to move the mortgage to another lender.
And sure, the new lender will let you have access to more money, but you also have to qualify for the extra funds and if their qualifying criteria has changed you may not qualify.
As well, there is no guarantee what 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—be it credit cards, lines, car loans, or overdraft that you may have with a bank—with your collateral loan.
A conventional mortgage let’s you establish a set amount you are borrow, the rate for the term you have chosen 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, that option is available.
If you don’t borrow any more money against the property, the principal balance on a conventional mortgage goes only one way—down.
And now most Canadian major chartered banks will accept “transfers” of conventional mortgages from one to the other at little or no cost
Collateral vs. conventional—it’s the classic case of buyer beware.
Be sure you take on a mortgage that is best suited to you and your lifestyle before you sign up.