When shopping for a mortgage, most Canadians are looking for low payments, flexible pre-payment terms and of course the best interest rate possible. However, in recent years the landscape of the mortgage market has changed due to the introduction of the collateral charge mortgage. So what is the difference between a standard charge mortgage and a collateral charge mortgage?
Standard charge mortgage – Little to no cost to the consumer when switching your mortgage from one financial institution to another. This allows you to shop for the best rate and product when you are ready to renew or refinance. Also, your other debts such as a line of credit or credit cards are kept separate from your mortgage. The interest rate stays the same for the term of the mortgage, if you are late or your financial situation changes, the banks can only charge the agreed upon rate and perhaps some NSF fees.
Collateral Mortgage – Difficult to move to another lender at the end of the term and it does cost quite a bit if you decide to take advantage of better rates and products with a different lender. Another factor to consider is that all of your unsecured debt such as credit cards and line of credits are tied into your mortgage. This means if for any reason, you happen to default on your other credit products, the bank will take the equity out of your home and pay off the debt and close that credit line. Under Canadian law, this is legal if you have a collateral charge mortgage. Collateral charges also allow lenders to increase the interest rate if you happen to fall into arrears or default on your payment. In this case, the banks have the right to increase your interest rate by up to 10 percentage points. An increase of this amount on a loan as large as a mortgage can cripple ones financial future and should not be overlooked.
Collateral charges also differ in the way they are registered. A standard mortgage is done with the land title or registry office and can be switched, transferred or discharged. The collateral charge mortgage is registered under the Personal Property Security Act (PPSA) and can only be registered or discharged, not transferred. This means that at the end of the term if you want to take advantage of a better rate that is offered by another lender, you will have to pay discharge fees that could cost you approximately $1000.00.
It’s not all bad news for the collateral charge mortgage. The product was made with a key feature that does make it attractive to some buyers. This particular mortgage product has the ability to register up to 125% of the value of the property at closing. This means that if you were to buy a property for $300,000 and the value has gone up to $375,000, you would be able to withdraw most of that equity without refinancing. Keep in mind you have to qualify for the new amount as well.
When shopping for a mortgage, make sure to ask your banker the tough questions. Is this a collateral charge mortgage? What are the implications down the road? You may not want the mortgage if your option to switch to a better product is gone, your loans become interconnected with the mortgage and in a crisis situation your interest rate can go up making life very difficult.
I am the mortgage expert servicing the Metro Vancouver and Fraser Valley. I ask the financial institutes the hard questions and shop on your behalf. I present options to you making sure you get the best rate and the best product every time! If you would like to find out which mortgage product is right for you, please contact me for a free consultation.
Jas Gill is a Mortgage Specialist with Dominion Lending Centres Leading Edge