FAQ: Collateral Mortgages in Ontario
In the past few years, a product called the Collateral Mortgage has been quietly making its way into more lender offerings in Ontario.
What is a Collateral Mortgage?
A collateral mortgage is typically written as a loan agreement or promissory note, with a collateral 'charge' on title as security for the loan.
The collateral mortgage is different from a traditional mortgage in several ways:
- A collateral mortgage is often registered on title for more than the amount of the loan. Many lenders register the mortgage at 100% or even 125% of the value of the property, even though the loan is for far less than that amount.
- With a collateral mortgage, new credit (like a home equity line of credit or HELOC) can be issued by the original lender without modifying the original document registered on title.
- Collateral mortgages are typically not accepted from other lenders in mortgage transfers. This means that in order to change lenders, the borrower is forced to pay penalties, discharge and other fees to the original lender.
What are the advantages of a collateral mortgage?
If a borrower plans to borrow additional money against their home, such as for a second mortgage or HELOC, they can do so without an additional document being registered on title (saving the fees to do so). They must, however, qualify for that product with their original lender.
This can provide flexibility and savings with regards to legal fees, but only if they borrow more money in the form of a secured loan or HELOC.
Are there any disadvantages?
If the borrower wants to shop around for additional secured credit, they can't, as all of the equity (or more) in their property is already registered against the property title.
This means that they are forced to apply with their original lender. If they don't qualify for the product at that lender, they cannot go elsewhere without paying to discharge the mortgage.
Also, the borrower doesn't have any negotiating power with their lender. They are at the mercy of that lender to pay whatever rate and fees associated with the product offered by the original lender.
Finally, if they want to change lenders before their term expires, they cannot - without paying substantial penalties and/or fees to discharge the mortgage, as many other lenders won't accept this type of mortgage in transfer.
Who offers Collateral Mortgages in Ontario?
Some of the major lenders that offer collateral mortgages are TD Canada Trust, Scotiabank, National Bank and Manulife. Some credit unions also offer these products. Not all of these lenders offer these mortgages exclusively, either.
What's the bottom line?
Although the collateral mortgage may work for some people, they are heavily weighted in favour of the lender for the vast majority.
By working with a independent Mortgage Agent or Broker, you can find out in advance which lenders offer this type of mortgage, and whether it is suitable for you.
Looking for more information?
If you would like more information collateral mortgages in Ontario, please get in touch!