Linda Linfoot

Collateral Mortgages - by Morgan Vaughan

Recently, it was announced that a major Canadian Lender would be registering all new mortgages as “collateral mortgages”.

• So what exactly is a “collateral mortgage?”

1. It’s a loan attached to a promissory note and backed up by the collateral security of a mortgage on a property.

2. Collateral mortgages have historically been used to register secured lines of credit, which allow the balance of the loan to float up or down depending on the customer’s use.

• How does it work?

1. The primary security on a collateral mortgage is a promissory note with a lien on the property for the total amount registered

2. You can register far more debt against the property than the property is worth. Under this new approach, the ‘collateral mortgages’ are registered at 125% of property value, even though that amount may not have been given to the borrower initially

• What are the potential down falls for borrowers?

1. Most chartered banks will not accept “transfers” of collateral mortgages from other chartered banks, this can result in additional legal fees and costs to move to another lender

2. Collateral mortgages are being registered on title with rates as high as prime + 10%, regardless of what the client initially receives

3. Effectively, collateral charges allow lenders to change the interest rate to borrowers after closing. Several lenders recently increased the interest rates on existing client’s Secured Lines of Credit due to this technicality. This won’t happen with a traditional mortgage.

4.   Renewal time (with a collateral mortgage) is when the bank can offer client’s whatever rate they choose and a client’s options are to accept it or pay legal fees to move elsewhere

5.   Hard times:

• The most damaging aspect of “collateral mortgages” is in the event of a client experiencing some sort of unexpected problems (even if temporary).
• The bank says that they can give you more money with no additional cost, but, they fail to mention that you still have to qualify to borrow that additional money.
• If you have had a credit set back and need to access $40,000 in hard earned equity from your home, the bank may decline you, another lender may want to help you with a short term 2^nd mortgage, except 125% of your equity has been tied up in a “collateral mortgage”. The only alternative would be to break your mortgage, incur a penalty and move to a potentially higher rate mortgage due to the current set back in your credit or income. This could end up costing thousands of dollars in the end.
• As brokers we need to educate clients to the potential impact that going with a "collateral mortgage" could have. There are many choices of lenders out there, it is very important to understand how lenders register their mortgages to ensure our clients are receiving the best possible mortgage product for them.