This is a term that is not often mentioned when buying a house and searching for your perfect mortgage. You could take out a conventional mortgage or opt for the collateral mortgage. This tool has been around for years but has been in the background with most lenders with the exception of TD Canada Trust, the no-frills mortgage available with ING Direct and with Coast Capital Savings to name a few. Here's the difference:
You're buying a condominium in Vancouver and let's say it's got a sticker price of $400,000.00. You're willing to put 20 percent down so your mortgage will essentially be $320,000.00. With today's low interest rates you may have us negotiate a five year fixed rate for around 3 percent.
With a collateral mortgage, everything is basically identical except the lender will register a charge of up to 125 percent of the value of the home, provided you have at least 20 percent of equity in it. In this case, the charge would be $400,000.00 plus another $100,000.00. The collateral agreement makes the assumption that you will want to borrow more money in the future and makes this available now. As long as you keep 20 percent of equity in your home, you will always be able to borrow up to 80 percent of it's value.
Collateral mortgages are great for homeowners that want that extra bit of borrowing ability with their mortgage as it will save a few dollars in fees by doing this upfront. The real winners are the banks because they have full control over your finances and collateral agreements make it almost impossible to leave their institution because it interlocks your lending.
What does all this mean? Read the fine print because what may seem like a great idea now, could cost you thousands down the road. For instance, let's say three years down the road into your five year term you want to switch to a different lender that you may have seen me advertise. In a collateral mortgage, you will not be able to switch or transfer to the new lender without paying discharge fees, penalties and re-registering your mortgage. This essentially will cost you hundreds, if not thousands in penalties and legal fees just to take advantage of another mortgage product. In addition to this, if you are to go into arrears or default with a collateral mortgage, the bank has the right to raise your interest rate. They simply can't do this with a conventional mortgage, if you want to transfer your mortgage, the new lender will pay your legal fees provided you do not make any changes such as add any new money to it. You would need to factor in your penalty to break the existing mortgage contract but in many cases if your current mortgage rate is above 3.50 percent, you would still most likely come out ahead by making the switch in today's market.
If you don't want the extra money and want the freedom to move your mortgage in the future, then a collateral mortgage is not best suited for you. Remember, mortgages are not just about the interest rate, they are complicated and contain copious amounts of fine print. Navigating through the mortgage process can be overwhelming, working with a mortgage professional simplifies the process and provides you with a selection of options.
As always, I encourage you to contact me if you have any questions with your current mortgage or are looking for one. Please find me on facebook at facebook.com/jnmortgages on twitter @jasonmortgages.
Jason Nesseth with TMG The Mortgage Group Canada Inc. If you have any questions or comments about this blog, please feel free to call Jason at 604.375.7375, email jason.n@mortgagegroup.com or visit his website at jasonnesseth.com