Understanding Collateral Mortgages

If you are thinking of going to your lender for your mortgage, it is important for you to know what a collateral charge is, and the pros and cons that come with it.

Collateral charge mortgages are becoming the norm for most banks and credit unions. If the option is given to opt out of a collateral charge, it’s presented as a small detail (usually a check box) in a 10+ paged document.

A collateral mortgage is not registered the same way as a traditional mortgage and because of that you cannot transfer the mortgage.  The lender can register an amount up to 125% of the value of the home regardless of the amount borrowed.  This is great if you are planning on refinancing or borrowing more money from the bank later on.  The downside is that at any time during your mortgage or even on renewal you cannot move your business elsewhere unless you refinance and ask for more money by the new lender. Of course there will be associated costs with legal & appraisal as you had done initially.

With current refinance rules allowing to refinance up to 80% of the home value, the borrower would need to have more than 20% equity built into the home in order to refinance. For many first time homebuyers putting the minimum 5% down payment a refinance would not be an option unless they have paid down their mortgage to less than 80% of the value of the home, or the property has increased in value enough so that less than 80% of the value is mortgaged.

For example, if someone bought a place for $200,000 with 5% down ($10,000), they got a mortgage of $190,000. In order to refinance the borrower can only borrow up to $160 000 (if prices have stayed the same). If property prices went up by $50,000, bringing the overall value to $250,000, the borrower can request up to $200,000 in a refinance.

For those that like to keep their options open and have negotiating power, collateral mortgages are not a good idea. It would make it impossible for anyone with less than 20% equity to move to a new lender disregarding the service/rate provided since the lender knows that they have the business, there is a no need to stay competitive. Before signing, speak to your lender/ mortgage professional and see if collateral mortgages are a smart move for you.

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About Atrina Kouroshnia

Atrina Kouroshnia is an independent, licensed, mortgage broker in the province of British Columbia. She has a degree in Human Relations & Commerce, and past work experiences in HR & Real Estate Development. She comes to the table with great customer service and problem-solving skills. Her approach to finding the best mortgage solution involves both short and long-term planning, making sure her clients are in a suitable mortgage that is flexible to their needs.