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!