When you purchase a home, your name is on your land title as being the owner of the property and any other interests in the property- such as a mortgage- will also go on title. We assume that all mortgages are registered the same- however there are very big differences between a standard mortgage charge on title and a collateral mortgage charge. Collateral mortgage’s are becoming popular with the major banks with some setting up all mortgage’s in this manner. While certain products are required to be registered this way and can offer some consumer benefit, consumers need to understand the vital difference’s compared to a standard mortgage to decide for themselves if it is the right kind of product for them or even necessary for their goals and needs.
The simplicity of a standard mortgage charge on title.
A standard mortgage charge on title is the amount of money that you borrow from the bank. For example: you bought the house for $400,000.00- you put down 20% to avoid paying default mortgage insurance therefore your mortgage with mortgage company ABC is for $320,000.00. Mortgage company ABC will register a mortgage on your title for $320,000.00- which is same amount as your mortgage. In this type of registration, the mortgage is the only security for the debt.
With a standard mortgage charge it is payable (meaning the lender can request to collect the entire mortgage) only on maturity (the end of the term date). If you miss a payment, you have the right and ability to make that payment to catch up, and the bank must honour that mortgage until your renewal period. Keep in mind- if your late or miss a mortgage payment your bank may choose to not renew your mortgage come renewal time and it could be very difficult to find another lender willing to lend to you. Best practice- do not miss a payment and if you foresee potential issues in the near future- for eg. critical illness or loss of job- be sure to contact your lender to discuss your issues before they become a problem.
The more complicated collateral mortgage charge on title.
A collateral mortgage charge on title is an “all in” debt. This means the mortgage is registered against the property to “collaterally secure” that debt. Essentially your home is extra security for that mortgage debt. Using the example above- the collateral mortgage lender XYZ would then register to the full value $400,000.00 (or even above with some lenders registering up to 125% of the value) of the home on title. A collateral mortgage can demand repayment in full at anytime without justification. This is the lenders right. If you are required to pay back your entire mortgage immediately leaving you without enough time to find a new lender- you will be forced into foreclosure.
How or why would this happen?
Collateral charges on your title effectively secure all of your borrowers debts, including credit cards and unsecured lines of credit, car loans and even overdraft to your collateral mortgage if they are all within the same institution. This would also include any future debts you may have with the same institution. As a consumer you should know that if you are behind on a credit card payment, car payment or even small print items such as your insurance payment, or condo fee; essentially anything outlined in your mortgage agreement, the current lender who has your collateral mortgage has the right to call your mortgage to be paid back on what was delinquent.
A few more items to note
- A collateral mortgage charge- is essentially a collateral agreement is between you and the bank and not a registered interest in the mortgage amount on title- like a standard mortgage. Because of this way of registering at land titles, the mortgage can’t be switched to another lender without using the services of a lawyer or notary to make the change. This can cost anywhere between $400-$700 and upwards. This is a challenge if your needs have changed and you want to access better rates/conditions from another lender at your renewal time. It is important to note that many lenders are now offering collateral switch programs or specials in which they will cover the cost of the charge and charge you a slightly higher rate. Or some might cover the whole cost depending on the promotion at the time of your switch.
- As a collateral mortgage charge is an “all in debt”- if you default on any one of those debts, then you could also be considered in default on your collateral mortgage. So your $2000 credit card that you did not pay, could very well cost you your home- because the lender has the security of your home against all debts. The lender can call your loan- sell your home and require that all debts be paid from the sale of the home- even if you have never missed a mortgage payment. Which is also important to note that if you miss a payment- even one- the lender can call the entire mortgage immediately- interest and principle- payed in full. Unfortunately, if this happens- there is very little you can do but try to find another lender in a short time frame which can be difficult and especially difficult once a foreclosure is launched.
- A collateral mortgage will not allow another lender to go into 2nd place behind them on title. In the case of a standard mortgage- if circumstances arise that require a borrower to arrange financing to go behind the first mortgage to help restructure debts or other financial issues- a standard mortgage does not restrict that- assuming there is enough equity to do so. If you have a collateral mortgage, it therefore makes the most sense to have your mortgage set up so that it is readvanceable into a line of credit. Best to discuss this option with your mortgage sister!
The need for a collateral mortgage and what can they offer?
If you have a mortgage product that has a line of credit attached (secured to the property), the only way to register this mortgage type on title is collaterally. This is because your line of credit can go up and down- up to your borrowing limit. The flexibility to access the equity in your home, when you need it and pay it off without penalty, and to avoid going through the process of requalifying or refinancing can be liberating. For people who are eager to pay off their mortgages faster- there can be great benefits especially if using a specialized all in one product. For business owners, self employed or commission income earners- having a flexible product that works with your fluctuating income is necessary to pay down your mortgage when it works for you, and pay the minimum when your cash flow is tight. Investors can invest their own cash in properties by using the equity in their homes through a home equity line of credit- and its ready when needed.
IF you mortgage is already registered collaterally and you have good equity in your property, potential savings can occur on appraisals and registration charges if you would like to refinance your mortgage or add a line of credit by borrowing from your equity. NOTE: in order to refinance (take equity out of your home) you would need to leave at minimum 20% equity within the home. EG. value of home $400,000, 20% is $320,000 and mortgage balance is $300,000- you can access the $20,000 between $300,000 and $320,000 via refinance or line of credit. You can see that the benefit of a collateral mortgage offers no value to a person who has a high ratio mortgage (meaning they put down less than 20%) as it will take some time to build enough equity to access.
Overall, a collateral mortgage when a person arranges it to have a home equity line of credit connected can provide great flexibility and there are some great products out there we would be happy to share with you. If you have a solid understanding of debt and credit management, and have a low likelihood of financial vulnerability a collateral mortgage charge may be a great product for you. However if you or the other signers on the mortgage are not great money managers or you don’t have a sufficient assets to liquidate should a life event impair your ability to stay on top of your finances, then a standard mortgage may be a wiser choice. A collateral mortgage also has no benefit to you if you do not have equity in your property. There are many lenders who do not register as collateral, and we are here to help inform you of your options and choice.
Your mortgage is the largest debt you will take on in your lifetime. At Mortgage Sisters West we listen and help assess your needs, your comfort level, and your goals to help you determine the right questions to ask yourself and your family. We provide knowledge, advice and choice so that you can make an informed decision.