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Thread: Collateral Mortgages Beware ! - CBC Marketplace

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    Make sure your MTG is standard & NOT collateral !

    We all know about fixed rate, variable rate, closed , open mortgage etc..but very few know about Collateral mortgages.

    http://www.youtube.com/watch?v=169T3_7F_3o

    Published on Feb 6, 2013

    CBC marketplace did a show on banking fees & collateral mortgages.

    There are 2 types of mortgage registrations in Canada: standard charge and collateral charge.

    TD & ING register all their mortgages as collateral charge where as other banks such as RBC, Scotia and National Bank register some as collateral charge.

    This is good for the borrower if they intend to increase their mortgage amount in the future however moving the mortgage at renewal would involve legal and appraisal fees due to the type of mortgage registration.
    This thread is currently associated with: N/A
    Last edited by tjthemanto; Sat, Feb 28th, 2015 at 06:27 PM.
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    We used a mortgage broker to shop for the best rate and conditions.
    Interesting video.
    Thx.
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    You may not have a choice with some mortgages. If you are looking for a HELOC this will be registered as collateral. Everyone is told to avoid collateral mortgages. The only negative feature is that if you refinance or switch you will need a lawyer.
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    Great Post TJ!

    dougboswell - As far as it being the "only" negative feature. . . I think those are really BIG ones. . . mainly the refinance. If a collateral mortgage can be 125% of your home value *without you even being aware of it. . . that's a problem. I understand a collateral mortgage for the original maximum amount of an HELOC (or Home Equity Line of Credit) but other than that it's just a grab. Mainly because the home owner has to go through the application process and there's little guarantee they'll get approved. It's like holding a client's home hostage.

    * as in customers are rarely advised of its meaning. . .and if they are at all, it's only the positive aspects. . .not the negative.
    Last edited by MortgageQueen; Sun, Mar 1st, 2015 at 01:41 AM.
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    Quote Originally Posted by dougboswell View Post
    You may not have a choice with some mortgages. If you are looking for a HELOC this will be registered as collateral. Everyone is told to avoid collateral mortgages. The only negative feature is that if you refinance or switch you will need a lawyer.
    We are not even talking of breaking or switching the mortgage mid term . We are talking about at the end of the term.

    So at the end of the term if you are getting a better rate of MTG with some other bank , why wouldn't you switch ? i can understand penalties/fees for breaking mid term , but this is even after your term is over .

    Your 5 year term is over you should be able to go anywhere you want without the huge penalties , which are not there if it was a Standard Conventional Mortgage,

    If it was standard MTG you can easily switch at the end of your term , but if its collateral MTG you have to pay huge fees & are held hostage like MortgageQueen mentioned
    Last edited by tjthemanto; Sun, Mar 1st, 2015 at 03:44 AM.

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    A collateral mortgage can trap you: Roseman

    You may want to change lenders at the end of a mortgage term.

    But with a collateral mortgage, your freedom to move will be constrained.


    http://www.thestar.com/business/2015...u-roseman.html
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    Great info. Thank you very much for sharing...............................

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    I second that! Excellent info tjthemanto! I believe all Canadians going for a Mortgage should be fully informed about what a collateral really is all about so they do what is best for themselves and not the bank!!!!
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    Consumers need to be more aware of terms especially where their finances are concerned. When applying for a mortgage they need to ask what type of mortgage is it. That being said it will also be in the commitment that it is a collateral mortgage. They need to read the commitment over carefully rather than simply sign on the dotted line where the agent tells them to. Licensed mortgage agents have a fiduciary duty to explain to a client what a collateral is.

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    There is a LOT of misinformation out there, when it comes to collateral charges. Unfortunately, some people use the word "collateral" as a way to scare a client and push him/her towards a different product. So, this will be a long post, but some important info will be shared here to help people understand how this actually works. And, most importantly, I want people to understand that in some situations, clients will actually BENEFIT and SAVE a ton of money with a collateral charge. See more below.
    First, we need to properly understand 2 words, often misunderstood, but that completely different meanings and purposes in the financing of a property : mortgage and charge.

    A mortgage, is just a loan.. a certain amount of money that is advanced to you, under he expectation that you will pay it back in X amount of time, at X interest rate.
    A charge, is the instrument that protects the interests of the lender, as he registers a lien against the property. Its purpose it to offer the lender some security, as the loan itself, although legally your responsibility to be repaid, has to be secured against something. That something is the property itself.
    Let's assume a scenario, where the client is purchasing a property worth 500k and need a mortgage of 300k. When you obtain a mortgage (the loan) from a lender such as Scotiabank (just to illustrate), Scotia will advance to you the 300k you need, and register a charge against your property in the amount of $300k. That way, should something happen and you cannot pay the loan back, the lender can exercise its rights and collect their 300k, upon the sale of the property. The only problem here, is that if you need to borrow another 50k (for renovations, lets say), Scotia cannot give you another 50k, as they have no security to protect/cover that loan. A collateral charge allows Scotia to register an interest against your property, in the amount of 500k (property value), so that they can give you the 300k mortgage you need, plus they can also advance you 50k as a Heloc, now, or at a later time. If the client has that 300k mortgage, then goes back to Scotia asking for that Heloc with another 50k limit... then 1 year later, goes back to Scotia and needs another 50k (let's say - to consolidate debt), Scotia can still advance them the extra 50k (so now we have a 300k mortgage, plus a 100k Heloc) - all of this is done WITHOUT the need of a new charge being registered, therefore savings the clients the legal fees he would normally pay (around $500.00 to $700.00).
    With a "standard" mortgage charge (not a collateral charge), the client with a 300k mortgage would have to pay legal fees to draw out those first 50k, then pay again legal fees 1y later to get the other 50k, as the only security protecting the loan with Scotia is the 300k charge on the property. A collateral charge, which could be registered at a higher amount, would oofer Scotia security up to 500k in this example, and this is why there is no need to pay legal fees over and over.
    Now let's take a look at the down side of a collateral charge : they cannot be re-assigned from lender A to lender B, at the end of the term, without the legal fees. A standard charge can easily be reassigned from A to B, and the new lender generally covers the associated costs to have a title company such as FCT or FNF Canada modify the existing charge, and remove the name of lender A and put lender B. A collateral charge cannot do that, it has to be discharged, and a new (collateral) charge be registered, and this is why it costs some $700.00 + the discharge fee your current lender adds (around $300.00 or so).

    So, we now understand, like Dougboswell mentioned before, that the only difference between a collateral charge and a regular, standard mortgage charge is that fact that a collateral charge cannot be reassigned from A to B for free, at the end of the term, so this translates to about $1000.00 in costs the client will have to cover out of his/her own pocket, should he/she wish to change lenders at the end of the term. Does that make collateral charges evil? Absolutely NOT! For instance, let's assume the same client with the 500k property and 300k mortgage, with the following options below:

    TD bank (and they use collateral charges only) offers a 5y fixed rate at 2.79%
    Merix (and they do not use collateral charges) offers a 5y rate at 2.89%

    A client may watch the CBC report and be under the impression he will be tied up to TD for life (which is NOT true) and pick the Merix offer to avoid the collateral charge. But effectively, he wil be paying 0.10% more in interest per year, which on a 5y term amounts to 0.50%, which translates to approximately $1500.00 in extra interest, on top of what he would pay TD. Had the client chosen TD, he would save those $1500.00, and yes - he would have to spend those $1000.00 between legal fees and discharge fees, but would still net $500.00 in savings.

    To make matters worse, I have seen clients that explicitly wanted to have a Heloc, and after talking to someone were informed of TD collateral charges and chose Scotiabank instead, then went back to Scotia to apply for a Heloc, and it was converted to a collateral charge. This makes NO SENSE!

    On that note, TD Bank does not force the registration of 125% of the property value. You can request either the mortgage amount, the purchase value or 125% of the purchase value. NBC allows the mortgage amount or the purchase value.
    I had a collateral charge with NBC for a number of years, and due to the particulars of my needs (I borrowed heavily against the equity in my property to invest overseas) I ended up refinancing my own property 3 times, always to increase the Heloc limit. I have spent $0.00 in total, to get my Heloc. If I did not have a collateral charge, I would have spent legal fees each of those times.
    Sure - there are situations where a collateral charge adds no benefits. For instance, someone buying a property with minimal equity (say 5% or 10% down payment) will not be able to benefit from the ability to re-borrow easily and at no legal cost anytime soon. A standard mortgage would be just fine, assuming he is getting a comparable rate on it.

    All things equal, a standard mortgage charge will allow the client to freely change lenders, and therefore give the client more freedom down the road. But the rates between the collateral product and the regular charge product should be equal. If a lower rate is offered with a collateral product, one should properly calculate the bottom line, and then make a decision.

    All in all - do NOT avoid a collateral charge, as it can benefit you (in features) and even save you money. But it is crucial that your broker or banker explains (and justifies) to you how you can benefit (or not) from those products. Be informed.

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    That was a very good definition VM. First let me say I agree that there are definite advantages for certain people to have a collateral charge. . .your personal example being one of them. And yes, if you have a combined mortgage and secured LOC, it will be a collateral charge no matter where you go. . . .but I'd like to play a little devil's Advocate.

    Far too often I hear of people with collateral charges that do in fact want to borrow more, but that Lender says they are not "qualified" to borrow more. Fine. They have their rules. Unfortunately for Mr. Jones, he can't go and get the money elsewhere either because his security is tied up in the collateral charge. Sorry Mr. Jones. You are left empty handed.

    One of the reasons you mentioned that one might need the money is to consolidate debt. Problem is, when people get to the point that they need to do that, sometimes their credit or income is less than desirable,. . .so will not qualify for extra funds. (at least from their bank)

    In regards to Lenders "not forcing" clients to add the extra security amount to the collateral charge, you are absolutely right. BUT my beef is, almost always the bank employee will explain the benefits but not the downside. Naturally the client enters the agreement completely unaware he may be turned down despite the fact the Lender now already possesses the extra security.

    In regards to the comparison of rates between TD and Merix. . . A very large proportion of Canadians break (or prepay) their mortgage. With that comes a penalty. . . if it's one of the big banks, it's a whopping one. Has anyone here had to pay a penalty with 2 or 3 years left in their term?? Than you know what I mean. Not so with Merix. They (along with other lenders similar to them) are much cheaper.

    The exception would be a variable rate. . .but again. . if you went to lock in from a variable rate to a fixed rate, Merix would smoke TD every time. These are 2 very common occurrences for a typical Canadian mortgage. This is why the dirt cheapest is not always the best. It bites you in the end, so you end up paying much more anyways.

    All that said, I do believe collateral mortgages have their place for sure, but it's not truly suitable for all, so when a bank decides they're just going to go ahead and do it regardless if people would commit extra equity to the charge or not. . . that's not good business. . .at least for the customers.

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    Agree - the product is not suitable for all people.. just like a "regular" standard mortgage charge is not suitable for all people. What we need to do is educate people and properly explain the differences, and how those differences can affect (either in a positive or negative way) them. My problem with the amount of misinformation out there is that I have seen people so scared of a collateral charge that they opted to pay a 0.25% higher rate on a 5y term with a different lender, only to avoid a collateral charge.
    I watch the CP24 Hot Property show, and a gentleman from a fairly large and well known brokerage once said, on air, that "with a collateral charge you are forced to stay with your bank for life. You cannot ever leave your bank.." this is not true, and is beyond absurd.

    Most consumers are spreading wrong information, not because they want to, but they simply dont know the technicalities of those products. And their source of information is often what a newspaper published, or a documentary such as the CBC one. If you want to scare someone to death about collateral charges, just tell them to Google "collateral charges". What comes up is downright scary, yet it is mostly bogus.

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    Well I certainly hope FSCO slapped that broker's wrist quite sharply saying something so stupid.

    I totally agree education is the key. That's what I try to explain to people when I describe the role of a broker.

    A reputable broker will take the time to get to know their client including their entire financial picture, future financial goals, employment, family planning, etc.

    There's so many great Lenders out there that are client friendly and won't rob you blind. But there's still variables with each Lender, so a broker can choose the best one or two specifically for client.

    That doesn't even include all the extra support and info brokers supply. An example (as I'm sure you are familiar with VM) is getting "exceptions" to Lender or insurer rules. This often requires established relationships and finessing but can be critical for the client. All this for zero cost. You can't lose, right?

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    Good to know! Just sold a place that had a mortgage with TD. I did renew with them so didn't really know/find out the issues if I tried to switch. Just glad to be done with it now

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    Even after reading the benefits for a Collateral, I still would not in any way, shape, or form have that type of Mortgage. Maybe it's just me, but I stick to the way that has worked for us for years. It is unchartered territory that I would not want to explore!

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