Understanding Collateral Mortgages - John Gabriel Director of Education and Compliance Mortgage Alliance

Recently, TD bank has made changes to the registering of their mortgages. Effective October 18th, all new TD mortgages will be registered as collateral mortgages instead of as conventional mortgages.
These changes got me thinking so I thought I would share the following information with the network.

Firstly, the definition of a collateral mortgage:
It’s a loan attached to a promissory note and backed up by the collateral security of a mortgage on a property.

Normally collateral mortgages have been used exclusively for secured lines of credits
Some collateral mortgages are registered for the full value of the property.
The lender then allows, say, 80% of the value of the property to be advanced. As the value of the property increases over time, the borrower(s) can takeout funds up to 80% of the value of the new appraised value. All this for only the cost of an appraisal. Scotia Bank, National Bank & others have such secured lines of credit products.
Major chartered banks will accept “transfers” of conventional mortgages from one to the other at little or no cost.

So: my Pros & Cons of collateral mortgages.

Pros: I’ll discuss later

Cons:
i) Most chartered banks will not accept “transfers” of collateral mortgages from other chartered banks. If the consumer wishes to switch their collateral mortgage to another lender upon maturity, there will be legal & appraisal costs. Approx $750-$1000
ii) Upon maturity, would the lender offer only a posted fixed rate or just a slightly lower rate knowing the costs associated with transferring to another lender has legal & appraisal costs?
iii) Collateral charges allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing. On secured lines of credit, the interest rate registered at Prime + upwards of 10%.
iv) Collateral loan involves the other debts you may have. Under Canadian law, a lender may seize equity to cover other debt you have with the same lender. So, in essence, you’re possibly securing all your loans that you have with that financial institution; be it credit cards, unsecured lines of credit, car loans, or overdraft etc.

Now the Pros:
I can’t think of any!


John Gabriel AMP
Director Compliance & Education
Broker of Record-Ontario Lic# 10530
Mortgage Broker-Alberta
Designated Individual, Broker-B.C.

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Lisette Amalfi, AMP
Mortgage Broker/Owner
Mortgage Alliance OAC Mortgages Inc.
Brokerage License Number 10928

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