PROS AND CONS OF COLLATERAL MORTGAGES

During the past couple of years the term “collateral mortgage” has gained a bit of a negative reputation, especially since TV shows like CBC’s Marketplace have taken notice. Marketplace felt it was worth doing a segment about collateral mortgages because the lenders offering this product were not disclosing the downside of this type of mortgage.

Collateral mortgages are designed to allow more flexibility in repayment terms and products secured by a residential property. Under the cap, or global limit, a borrower can have a regular mortgage, line of credit, a credit card and multiples of each of these products. When used for this purpose, collateral mortgages are excellent products that enable homeowners to attain cheaper interest, access higher limits and take advantage of splitting mortgages.

Collateral mortgages have been making news lately not because of these positives, however, but due to the negative ways lenders have been using them. When a regular conventional five-year mortgage (or any other term) comes due, or is up for renewal, the borrower can “switch” their mortgage to another lender at no cost. This type of mortgage is registered against the title of the property with the amortization outlined, so another lender simply pays out the other mortgage and continues on with the same amortization and balance as the previous lender had in place.

Under a collateral mortgage however, when the mortgage comes up for renewal, it would actually have to be discharged before another lender could take over the mortgage. This means a lawyer must discharge one mortgage and register a new one, which can result in fees ranging from $500 to $1,000. Not only would it be subject to legal fees, but all secured debt would have to be paid out with the mortgage, including secured credit cards and lines of credit.

Technically, this is considered a refinance and, according to the new federal guidelines, refinances are limited to 80 per cent of the property’s value. So, if the total amount being borrowed is greater than 80 per cent of the property’s value, it may be impossible to switch to another lender until either the debt is paid down or the home value increases. Some lenders have been using this as a retention tool, meaning that they place all of their clients in collateral mortgages knowing that, at the end of their term, it will cost them a significant sum to switch their mortgage to another lender – if it’s even possible to switch given the loan-to-value restrictions. This is why collateral mortgages have gained a bad reputation. Clients weren’t being notified that they couldn’t simply switch their mortgage to a new lender upon renewal.

In order to attain a full objective understanding of whether this type of mortgage is right for your client, be sure to consult with Dominion Lending Centres.  We have access to both collateral and standard mortgages.

1.  This is now the lowest prime rate we have seen since 2009.   There have been two prime rate reductions already this year.

2.  The banks don’t always respond and reduce their Bank Prime Rate.  They pocket the difference as a profit when they are borrowing money, so it’s common after a rate reduction for them to respond slower and in the most recent reduction they did not match the rate decrease in full.

3.  While rates have been at a historic low (or close to it) for the past several years, this does not generally impact your ability to qualify for a higher loan amount.   So far, there has been no change to the qualifying rate required to get a variable rate mortgage, which is more than double that of the rate you will actually receive. Variable rate qualification is based on a rate of 4.64%.  In terms of a payment reduction for existing mortgages, only expect an approx $4.00 per 100K. This provides an opportunity to optimize your mortgage by keeping your payment the same or increasing it.

4.  Fixed Rates are primarily based on the bond market and Variable Rates are tied to prime rate- whom you select as your mortgage consultant for life must have a plan for watching these indicators, while also putting together a long term mortgage strategy for you.

5.  If you have a Variable Rate Mortgage or Line of Credit, you don’t have to do anything to receive the rate reduction- the lenders will do it for you automatically once they have decided how they will choose to follow the BOC’s announcement.

Want to ensure you are getting the best rate AND mortgage for you and your family? Contact me at Dominion Lending Centres so we can review ALL your options.