Are You Aware of What You’re Really Agreeing to With Your Bank Mortgage?
In Recent years banks have started switching from conventional to collateral mortgages. While this has allowed them to offer lower interest rates in advertising and on paper, the way that interest is calculated and the restrictions it adds may make it not worth the “savings”. Many Canadians who have signed up for these mortgages don’t realize what they have actually agreed to, so this quarter we are comparing the conventional and collateral mortgages in order to allow you to ask the right questions and make the right choice for you.
First, conventional mortgages generally register the mortgage at the actual loan amount, whereas a collateral mortgage will register 100% of the value of the home. By registering a collateral mortgage at 100% or higher of the fair market value of your property, any future borrowings that you may want to leverage from your home will likely have to come from the collateral mortgage holder. For instance, if you wanted to secure a second mortgage where the total loans outstanding would be less than 80% of the value of the property, no second mortgage/Home equity line of credit could be arranged from a different lender because they would have to register behind the collateral mortgage which may be listed at as high as 125% of the property value, even though only a fraction of that amount may be outstanding.
This could also impact your ability to qualify for any type of lending program outside of what your primary mortgage lender is offering due to the fact that other lenders will likely consider the full amount of the mortgage registered in their debt service calculations. So even though you have good income and credit and low outstanding balances, you could still be viewed to have an excessive debt load, causing otherwise straight forward credit applications to be declined.
Second, the nature of the way the collateral mortgage will likely be written, will allow the lender to utilize it as security for any other loans, credit cards, and lines of credit you may have with them. Effectively, they may be able to become fully secured by real estate for any and all borrowings made to you once the collateral mortgage is put into place. For example if you have a Visa with your lender, then you sign up for a collateral mortgage, the lender can now secure the Visa with your property without you realizing it.
Third, if you do fall behind on your mortgage payments, the collateral mortgage provides the right for the lender to potentially start charging a higher rate of interest if a higher rate is written in compared to what you are initially paying. Because the lender has such a strong securing position, they can justify the increase to cover a higher risk of repayment default while not really having any real risk of potential loss. The end result is even if you get back on track, you now have a higher interest rate to pay, reducing the amount of principal you are paying down. This can also lead to higher prepayment penalties if you try to move your mortgage to another lender.
Fourth, collateral mortgages are not portable. Therefore if a client sells their existing home he or she cannot move the mortgage to their new property. This could result in the loss of a low rate and potential penalties to break the mortgage. Even at the end of your term, when you would normally be able to shop for a lower rate and negotiate your next term, the cost of switching lenders is much higher. Whereas the conventional mortgage can move from lender to lender the collateral mortgage has to be discharged and re-registered, which means legal fees you normally wouldn’t need to pay. This takes away all your negotiating power when it comes time to set the rate for your next term.
Currently TD and ING are only doing collateral mortgages. BMO, CIBC, Bank of Nova Scotia and RBC are doing both collateral and conventional. Note: the last four lenders may offer a reduced rate but mortgage will be collateral and with multiple restrictions (primarily prepayment and refinancing of mortgage)
Advantages of Conventional Mortgages
· Transferable lender to lender with no fees
· Portable between properties (if you sell existing home you can port existing mortgage to new property) · Pre-payments are available
· Rate of interest is calculated semi-annually vs collateral mortgages above which are calculated monthly so essentially a collateral mortgage calculated monthly at 2.89 vs a conventional mortgage calculated semi-annually at 2.99, in the end the rate works out to be the same.
· The required mortgage will be registered only, not 100% of property value (we can register a higher amount for future advances only upon the clients request)
Whether it’s your first mortgage or your next mortgage, Langlois Financial Services can help you get the mortgage that is right for you.