Posted by TMG The Mortgage Group
There has been a lot of interest in collateral mortgages since CBC’s Marketplace
took a stab at TD Canada Trust’s product on January 27, 2013.
Up until a
few years ago, most mortgages were registered as a standard charge mortgage. The
major decisions were to opt for a fixed or a variable-rate mortgage and what
term to select.
In 2010 some banks switched to collateral charge
mortgages. Traditionally, Home Equity Lines of Credit (HELOC) and revolving
credit lines are considered collateral because they allow borrowers to readvance
their loan, to access extra funds, without re-negotiating. Collateral mortgage
charges register loans at a certain percentage of your property, up to 125%,
regardless of the initial amount borrowed. If your home is valued at $250,000
and you borrowed $200,000, a mortgage could still be registered against your
home for $312,500.
With a standard charge mortgage, you agree to how much
you’re borrowing, the interest rate, and the term. So if your home is valued at
$250,000 and you have $50,000 down, then your mortgage is $200,000. And with a
standard charge your mortgage is registered at $200,000. If you wanted a line of
credit, for example, you would have to reapply.
With collateral
mortgages, the bank thinks you will likely want to borrow more money in the
future so it is establishing a global limit. The reasoning is that it will cost
consumers less because there are no additional legal fees if the customer needs
to refinance. Another reason is that it keeps customers from moving their
mortgage business elsewhere.
There are pros and cons to collateral
mortgages with the banks having the advantage. It’s an okay product for
homeowners who want extra borrowing ability along with their mortgage but it’s
not for everyone.
“Yes, homeowners can refinance throughout the term without
incurring legal costs as long as they’re not asking for a total loan greater
than the collateral charge at the time of renewal or refinance, said Steve
Nipius, TMG’s Deal Centre Manager. “However, if a homeowner only has a 5% or 10%
down payment, then it’s pointless to have a collateral charge.”
The cons
may outweigh the pros. First of all, if a homeowner wants to switch to another
lender, they are forced to pay legal and registration fees. More importantly,
most banks won’t allow transfers because of the other loans tied to the
collateral charge. This makes it harder to leave the lender since all your debt,
if any, is under one agreement.
“Banks know there are costs involved to
the borrower if they decide to move, so there no need to offer the best rates,
“Steve said.
Also, consider this scenario: Your mortgage is in good
standing but you default under a credit line with the same bank. The bank could,
in most cases, start default proceedings under your mortgage, meaning you could
lose the house.
However, if you carry a lot of debt, require a
readvanceable loan and frequently need access to cash, a collateral mortgage
will save you money in the amount of legal fees you are paying.
But, if
you want to the freedom to move your business elsewhere, it’s not likely the
best option. Collateral mortgages mean less choice and flexibility for
consumers. Most experts advise to shop around at the end of a mortgage term
because you can save up to 0.5% on your interest rate, which can translate into
substantial savings.
Getting a standard or collateral charge mortgage is
just another complication for many homebuyers and owners. Get advice through
your mortgage professional whose focus is on mortgages and who deals with a
variety of lenders to get the best mortgage for your situation.
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