In the last few years, more and more lenders, specifically the big banks, have switched the way mortgages are registered on a property. Unfortunately, until a recent policy change was made by the Department of Finance, there was little to no disclosure required to clients of this change, and what it is. Though collateral charges do have its benefits, it also has many pitfalls, and the lack of disclosure left many home buyers in a mortgage that just wasn’t the right fit for them. For this post, I will be going over the differences between traditional and collateral mortgages, and what the downsides to each are.
What is a Traditional Mortgage?
With a traditional mortgage, the amount being borrowed, interest rate, and repayment schedule are all registered at the determined values when the loan is acquired. At the end of the term, you will have the option to renew with the same lender, or have your mortgage broker shop around for a better rate and terms with no costs involved. This creates a lot of flexibility for the client, and ensures the client isn’t tied into one lender until the mortgage is completely paid off.
- With a traditional mortgage, you cannot access equity built up in the property without acquiring a second mortgage, refinancing your current mortgage, or registering a separate secured line of credit on the property.
With a collateral mortgage, the lender registers the mortgage amount for up to 125% of the property’s value. This means the lender ties up all of the equity in your property and potentially future equity gained from market growth. This allows the client, as long as the lender qualifies them, to refinance with no extra costs involved. In most cases, lender’s will not let you re-finance above 65% of your homes value. This means buyers without much equity established yet, may not see any benefit to a collateral mortgage.
- Lenders will not transfer or switch a collateral mortgage. This means when your mortgage term is up, you can’t shop around with different lenders until you have the collateral charge removed from the property (legal costs). Additionally, you will be subject to additional legal costs to have the new lender register their mortgage on title. With all these additional costs, the financial benefits from switching lenders will no longer be viable in most cases.
- If the lender does not qualify you to borrow additional funds, your options to approaching other lenders become very limited. This is because the first lender has tied up all the equity in the home, leaving no security for a new lender to register the loan on.
- If you are to default on another product such as a credit card with the same lender as your mortgage, the lender will have the ability to increase payments on your mortgage, or even foreclose on your home, even if you were making all your mortgage payments. This would not be possible with a traditional mortgage.
In conclusion, it is important to decide what is more important to you when acquiring a mortgage. If you would like the flexibility of being able to always have the best interest rate and terms, a traditional mortgage can be much more viable. If you put a lot of value in being able to access your home’s equity, and the other pitfalls of collateral mortgages don’t worry you, a collateral mortgage may be a better decision. Either way, information is power, and knowing the difference is important before deciding what will work best for you!
If you have any other questions related to this article, or any other mortgage related topics, please either send me an email at email@example.com, or give me a call at 778-822-5466. I am ALWAYS available for you!
Hardworking, Ambitious & Detail-Oriented, Sameer can be counted on for any financing needs you may require. Working in all aspects of financing(residential, commercial and private), Sameer has a passion for helping his clients, and making the mortgage process as smooth and stress free as possible.