Most people think of mortgages as pretty straight forward products. Our message is don’t be fooled, they are not. Finding the right solution is best done by partnering with an expert such as a mortgage broker.
The last couple of days have delivered the lowest rates ever, which is great news for those of us needing a mortgage, but again be diligent in working with the right partner to find the solution that is best for your particular situation – talk to us and we will guide you.
A relatively new option is a collateral mortgage solution. Most people are not familiar with this type of mortgage, but it has some unique features that may be beneficial.
We asked one of our preferred mortgage brokers, Jacques du Preez of Mortgage Allies to clarify things and provide his advice on collateral mortgages:
What is a Collateral Charge?
It is an alternative way for lenders to place a mortgage against a property. A collateral charge can contain more than one mortgage component such as a classic mortgage and a secured line of credit. Collateral mortgages are also re-advanceable.
What is good about collateral mortgages:
- Borrowers have access to the equity that they have created by paying down the mortgage principal.
- The borrower does not have to qualify for borrowing inside the collateral limit.
- This can be a great tool for business people to cash flow their businesses.
- The increasing equity can be used for investment purposes.
What is bad about collateral mortgages:
- Collateral mortgages are not transferrable. This means that the borrower will have to pay full legal fees to transfer the mortgage to a different lender at term maturity.
- These products are used as forced loyalty tools by lenders.
- They are often the source of increased debts and can be a hindrance to become mortgage or debt free.
- Collateral mortgages are not portable, nor assumable.
- They block out any other loans against the subject property, which means a borrower has no way of securing any other emergency funding if they need it.
- Collateral charges can lead to Power of Sales of properties.
Collateral mortgages are not for everyone and they should always be entered into as a result of a strategy.
Here are a few guidelines:
- Only allow the financial institution to collateralize the property for the total borrowings. Some institutions collateralize above the borrowing limit or even to 125% of the property’s value. There is no need for this and does not serve the borrower’s best interest.
- If a mortgage is above 80% of the value of the property the mortgage should not be collateralized. Under government rules there is no potential for future borrowings so there is no need to place a collateral on the property.
- Disclosure about collateral charges are usually only provided in the lender’s Standard Terms package which the borrower sees at the solicitor when the mortgage is closed. This is too late so insist to see your bank’s Standard Terms when you enter into mortgage discussions.
The golden rule: Don’t allow your lender to place a collateral mortgage on your property unless you have a reason to do it.
Ellen Roseman of The Toronto Star also wrote an article highlighting the differences between a conventional and a collateral mortgage.
Read the entire article.