Collateral Charge – What you need to know

If you own your home, or are searching for your first home, I’m sure many of you have heard about this term at some point. I wanted to make a blog post dedicated to the topic to hopefully shed some light on what they are, and why you should avoid them.

As per the Financial Consumer Agency of Canada web site, this is the definition of a collateral charge:

A type of mortgage whose features may include the ability to potentially borrow additional funds, subject to your lender’s approval, without the need to discharge your mortgage, register a new one and pay legal fees. If you want to switch your existing mortgage to a different lender at the end of your term, note that other lenders may not accept the transfer of your mortgage. This means you may need to pay fees to discharge your mortgage and register a new one in order to change lenders.

Looks great from the outside, right? You can refinance at no extra cost? Perfect! Before we go any further, I want to give some quick facts about collateral charge mortgages:

• They are used by most of the big banks and some of the credit unions.
• Most mono-line lenders* don’t register the mortgage as a collateral charge
• If you have a collateral charge mortgage with the same bank that all of your debts are with, and for some reason fall behind on your payments, they can send your property into foreclosure to recover the debts (this is HUGE! I recommend all of my clients to have their mortgage as a standalone product with a specific lender for this very reason)

 
*Mono-line lender – A lender that only focuses on mortgages

Now lets weigh the pro’s and con’s of a Collateral Charge Mortgage:

Pros

• With some institutions, you can register the charge up to 125% of the value of the property (You buy a property for $200,000 , you can register the charge on title up to $250,000 even though the property isn’t worth that much at this time)
• Can refinance your existing mortgage with little to no fee’s involved (some lenders will charge a small $500 fee for doing the refinance)

Cons

• Your home becomes a direct collateral to all of your debts (if you bank with the institution where your mortgage is)
• You are stuck with this lender even at renewal time unless you want to pay fee’s to switch to a different lender

What do I suggest to my clients?
I like to sit down with my clients and discuss a 5 year plan. What is your goal in the next 5 years? Do you plan on making any extra payments? Will you want the option to switch lenders to take advantage of a better rate at the end of your term?

In few cases, a collateral charge will make sense for my client. If that is the case, I will place them in one. However in most cases, a mono-line lender is superior as they don’t register as a collateral charge and usually offer an overall better product.

If you would like to discuss this in more detail, please feel free to give me a call on my cell at 778-554-4556.

Have a great weekend!

Many clients think that once they are pre-approved, they can write an offer on a house without a subject to financing clause on their real estate contract. However, this is a big misconception about pre-approvals.

Going through the pre-approval process in itself is very important. It allows me to sit down with you and take a look at the big picture. I have calculators that allow me to input your income, assets, and liabilities, and it lets us know what you qualify for based on lending criteria at all of the major banks.

When I do a pre-approval for a client and submit it to a lender, it is nothing more than a rate hold for 90-120 days. Most lenders don’t underwrite pre-approvals as they take a lot of resources for them and typically don’t turn into a real purchase. In fact, less than 10% of pre-approvals turn into live deals (reasons being; the client goes with a different lender at a lower rate, they decide now is not the time to buy, they lose their job, or can’t find the property that they want etc.).

I can understand that most people are reluctant to write an offer on a property because they are not 100% guaranteed financing. Although this is desirable, the fact remains that the lender still has to review every related document to the purchase prior to giving the final OK (these documents include the Appraisal(s), Contract of Purchase and Sale, Property Disclosure Statement, updated bank statements etc.). This is true for every lender that I can think of.

Aside from all of these concerns, the lender still needs to approve of the property. Is there an age restriction on the property, is it on leased land, is the roof falling apart, is the property a former grow-op, is the economic life of the dwelling too short to meet the lenders guidelines, the list goes on and on.

All I ask is that you take away from this article is that perhaps you are pre-approved; but the property may not be approved. It’s best to talk to a seasoned mortgage expert to find out about all of your options, and so that they can address any concerns that you may have.

Thanks for reading.

Michael Atkinson
778-554-4556

I’ve read a few articles recently that talk about RRSP loans and potentially using the tax refund towards a down payment on a home. From the sounds of it, this seems like a great idea! You get to contribute to your RRSP’s, pay less tax, get a big refund, and then have money to put towards a down payment on a home. However in some cases, this may not be ideal. Getting a sizable loan with a monthly payment may hinder your ability to qualify for a mortgage.

Let’s look at some numbers to further explain.

Let’s speculate here and say you have $30,000 of RRSP room to contribute. You get a loan for $30,000, at Prime + 2%, amortized over 10 years. This works out to a monthly payment of $316.00. You are in a 30% tax bracket, so when you file your taxes you get $9,000 back on your tax refund.  You also have an additional $6,000 saved up on your own for a down payment.

In total with the tax refund, you have $15,000 to put down. Since the minimum down payment you can put is 5%, that limits us to a home worth $300,000. To qualify for a home worth $300,000, given the fact that you now have a monthly RRSP loan payment of $316.00 (whereas previously you didn’t have any debt), you will need to make $51,000 annually.

If you didn’t have that loan payment and could save up the $15,000 on your own, or get it gifted from a family member, you would only need to make $42,000 a year to qualify for a $300,000 home.

If you’re a first time home buyer, you can use up to $25,000 of your RRSP money towards a down payment as well, but you have to repay it over the next 15 years and it has to be locked into the RRSP for 90 days prior to withdrawal.

In the end, it depends on your situation to determine if this would be a good idea or not. If your income is high enough to qualify for both loans and are willing to take on an additional monthly payment, than this could be a perfect fit for you. If you’d rather save up the full down payment on your own to avoid that additional monthly payment, then you may want to steer clear of this method altogether.

I suggest speaking to your Mortgage Broker to discuss these options to see if it would be a good fit.

If you have any questions please feel free to give me a call at 778-554-4556.

Thanks for reading.

How does the Credit/Beacon Score number work?

·         This three digit number is a statistical formula that takes your personal credit information from your credit report
·         Scores range from 300 – 900
·         The ‘Beacon Score’ is branded by Equifax
·         Everything counts: age, address, phone number, dependents, length of employment with same employer
·         Inquiries = 10% (kept on record for 3 years)
·         Length of credit history = 15%
·         Might want to keep trades that have a long and positive history
·         Employer on credit bureau
·         Equifax charges customer for electronic delivery but not via mail
·         Bad debt stays on for 7 years

How is your score determined?

Payment history: Roughly 35% of the total score

·         Account payment information on specific types of accounts including: credit cards, retail accounts, loans, finance company accounts, mortgage, etc.
·         Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and delinquency.
·         Severity of delinquency and amount past due on delinquent accounts or collection items
·         Time since past due items, adverse public records (if any), or collection items (if any)
·         Number of past due items on file
·         Number of accounts paid as agreed

Amounts owed: Roughly 30% of the total score

·         Amount owing on accounts
·         Amount owing on specific types of accounts
·         Lack of a specific type of balance, in some cases
·         Number of accounts with balances
·         Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
·         Proportion of installment loan amounts still owing

Length of credit history: Roughly 15% of the total score

·         Time since accounts opened
·         Time since account activity

New credit: Roughly 10% of the total score

·         Number and proportion of accounts that are recently opened, by type of account
·         Number of recent credit inquiries
·         Time since recent account opening(s), by type of account
·         Time since credit inquiry(s)
·         Re-establishment of positive credit history following past payment problems

Types of credit used: Roughly 10% of the total score

·         Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

How to read the Nine Point Credit Rating Scale?

·         R0 Too new to rate, approved but not used.
·         R1 Pays (or paid) within 30 days of billing; pays account as agreed.
·         R2 Pays (or paid) in more than 30 days, but not more than 60 days, or one payment past due.
·         R3 Pays (or paid) in more than 60 days, but not more than 90 days, or two payments past due.
·         R4 Pays (or paid) in more than 90 days, but not more than 120 days, or three or more payments past due.
·         R5 Account is at least 120 days overdue, but is not yet rated 9.
·         R7 Making regular payments under a consolidation order or similar arrangement.
·         R8 Repossession (indicate if it is a voluntary return of merchandise by the consumer).
·         R9 Bad debt, placed for collection

How to Improve your Credit Score?

The best way to improve your credit score is to make consistent minimum (or more) monthly payments for your credit cards, loans, mortgages etc.

If you have unused credit cards, I would suggest closing them, but make sure that you have at least 2 active tradelines (credit cards, lines of credit, etc.) and that they have been open for a minimum of 2 years. When qualifying for a mortgage, lenders look at your 2 year payment history as this gives an accurate description of your payment habits.

How to correct inaccurate information on credit bureau Equifax Canada?
CALL: 1-800-465-7166 between 8:00am and 5:00pm ET

Did you know?

·         I can help finance clients with bad or no credit if they have enough down-payment
·         I can help homeowners pay off high interest credit cards with equity loans
·         I will obtain exceptions from the banks for a client with imperfect credit history as long as their score is within the guidelines
·         I advise clients with bruised credit history to improve their score and qualify for a mortgage to get best rates and products

Need more information or have any questions? Call me directly on my cell at 778-554-4556, or send me a direct email at matkinson@dominionlending.ca Continue reading →