In the last few years collateral mortgages have gained quite a bit of a negative reputation. This has been heightened by television shows such as CBC Marketplace. Also, newspapers such as the Toronto Star discussing the downsides to a collateral mortgage and the lenders offering them.
One major challenge is that lenders who are offering these products are not disclosing the downsides to the consumer.
Pros and cons of a collateral mortgage
Collateral mortgage pros:
Collateral mortgages can come with more flexibility with regards to the products that can be secured against a property. Also flexibility is regards to the type of repayment. These products typically have a maximum borrowing limit. Within that limit there can be multiple lending products. Examples are a mortgage, lines of credit, credit cards and so on. When consolidating debt into this type of mortgage one can save on interest over personal interest rates. Also, with many of these products you are able to borrow back what you have paid off similar to that of a line of credit or credit card. Note, some banks, such as TD Canada Trust, register all their mortgages as collateral mortgages, even if it is just a standard mortgage like a five year fixed rate mortgage without all the multiple products within it or ability to borrow back what you have paid down.
During your term with the lender, for example during a five year fixed term, if you were to return to the lender to refinance, the collateral charge will allow you to do so with savings on the legal cost towards refinancing.
Collateral mortgage cons:
Collateral mortgages however have been making negative news. This negative news is due to some of the challenges one can face with this type of mortgage. When a standard conventional mortgage is at renewal one can simply switch their mortgage to another lender with no cost or penalties. This is because the mortgage is transferable. A collateral mortgage however is nontransferable. With that, it cannot be simply switched to another lender for a more competitive interest rate at renewal. In this situation to move lenders it would trigger a refinance. Unfortunately refinances come with appraisal and legal costs for the client. It can cost a client upwards of $1200-$1500 to move lenders at renewal.
Under the new lending guidelines one can only refinance up to 80% of the value of their property as well which could create challenges when wanting to switch lenders and not having enough equity in your property yet. In this case it may not be possible to switch lenders until your mortgage balance decreases further.
Furthermore, if you have multiple products within the collateral mortgage such as a credit card or line of credit, you would have to close them if switching lenders at renewal.
When the current lender has the upper hand in this situation. They may not be as proactive with low rate offers or matching other offers at renewal. This is because they know leaving them comes with extra work and costs. These mortgages can be a strong retention device for the lender.
Other collateral mortgage challenges to consider:
Another challenge with a collateral mortgage is that the lien registered against the property does not decline like a conventional mortgage. With a conventional mortgage, at the end of the amortization the lien will be at zero. The lien with the collateral mortgage typically will stay at it’s original amount for the life of the mortgage.
The negative news focus with collateral mortgages is mostly on how banks are not informing their clients of these downsides when offering the products. Also, that they are not informing clients that all of their mortgages are collateral mortgages when a client is applying.
How an Ottawa mortgage broker can help you:
I offer both conventional and collateral mortgages. I look forward to reviewing your specific needs and finding the best mortgage for you. Also, I look forward to finding you the best mortgage rates in Ottawa.
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Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.
Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.
