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Blog by Linda M Linfoot

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Collateral Mortgages

Beware of the Downside of Bank Collateral Mortgages
When you shop around for your mortgage, what comes to mind in the preferred features most Canadians desire? Best interest rates, flexible repayment terms, and low payments are at the top of the pile. However the mortgage market has changed dramatically over the last few years with the introduction of the banks using the collateral charge mortgage. First a quick definition: A collateral charge mortgage has as its primary security a promissory note or loan agreement and as a back up, a collateral security in a mortgage against your property. This is in stark contrast to the traditional standard charge mortgage we have known over the last 30 years. The main difference is in what happens after you have signed the dotted line and the mortgage closes. Here are the differences and the downside you need to be aware of when shopping:

Option to Switch Banks

With a standard charge mortgage, there is little to no cost to the consumer when switching your mortgage from one financial institution to another when a better deal is to be found. Whereas a collateral charge mortgage is not generally accepted in transfer and requires the mortgage holder to pay discharge fees and additional fees to register a new mortgage with their new bank.

Control of Equity – A Collateral Mortgage Case Study

A great question every Canadian should ponder is…Who owns the equity in my home? Me or the bank. The answer to this question comes into sharp focus under the collateral charge mortgage. Let me illustrate: Lilly and Fong were doing well for themselves in that they had prospered in their careers and the kids had just moved out of the house. They were considering purchasing a cottage from a friend and had approached their bank to see if they could extend their mortgage to access their equity making the transaction smooth. Their home was worth 650K and they only had a mortgage owing of 200K. Under their collateral charge mortgage, they also had access to 168K in a line of credit. Lilly and Fong needed 235K to purchase the cottage with their equity or an additional 67K. The bank declined their request.

Rising Interest Rates

Another major difference to note is that in a standard charge mortgage your interest rate cannot be increased during the term, even if you default or fall into arrears with your payments. Sadly, with a collateral mortgage, if you go into arrears or default, the bank has the right to raise your interest rate. Dig deeper past the generally asked questions of interest rate and the cost of the payment of your mortgage. Boldly ask your banker if this is a collateral charge mortgage and what the implications are down the road. You will find that after you sign the dotted line that your option to switch easily is gone.