A collateral charge mortgage isn’t easy to understand at first glance – and it’s actually been designed this way on purpose. Even the name ‘collateral mortgage’ sounds like something out of a technical finance journal – not meant for us mere mortals. The Bank will rarely explain what a collateral mortgage is really about – and with good reason…
But the main problem is not the name of the mortgage – the issue is that once you are in a collateral mortgage it is difficult and expensive to get out of one. A collateral mortgage could easily cost you thousands of dollars more down the road.
So the remainder of this article will explain how a collateral mortgage is different from a standard mortgage, what the issues are in more detail, and how to get out of a collateral mortgage for those who are already in one.
Collateral mortgage vs regular mortgage
A collateral mortgage is a way of registering a mortgage against the title of your home so that 100% of the value of the home is reserved by the mortgage.
In other words, when a collateral mortgage is registered against your home, even though your mortgage may only account for – let’s say for example – 50% of the value of the home, or 80% of the value of your home, the collateral mortgage, on the other hand, is always registered by your lawyer (on instruction from your bank) to 100% of the value of your home.
Think of it as reserving a table at a restaurant. If you’re going out for dinner with 4 people, usually you’d just think to reserve a table for 4. But with the collateral mortgage way of thinking, you’d reserve ALL the tables in the restaurant – or the entire capacity of the restaurant just in case your friends decided to show up. Or maybe you just don’t want to eat around other people.
In the restaurant reservation metaphor above, you own the restaurant and you would be allowing the bank to reserve all the tables for themselves.
Costs and issues of a collateral mortgage (vs. benefits)
In my opinion, a collateral mortgage is typically more in the lender’s interest, than in the homeowners interest.
- A collateral mortgage is NOT easy to get out of on the mortgage renewal date. Because of the different way in which the collateral charge mortgage is registered on your home, you actually can’t switch-transfer lenders on renewal date. The only way out of a collateral mortgage – even on the maturity/ renewal date – is through a mortgage refinance (which is different than a standard mortgage renewal). A mortgage refinance comes with higher rates and is usually more time consuming for the borrower. So this places the existing lender – the lender that originally got you into a collateral mortgage – in a very advantageous position.
- If negotiating on rate at renewal is like a game of poker, the lender has set themselves up to win with a collateral mortgage. In the lending industry, the collateral mortgage is known as a ‘client retention product’.
- A collateral mortgage makes it very easy to refinance or access a Home Equity Line of Credit (HELOC) with the Bank. In fact, a Bank will usually sell a mortgage on the HELOC feature and how the mortgage is ‘all in one’ including a HELOC. The issue here is that a HELOC has a very high rate of interest, equivalent to an alternative mortgage, and it can make it very difficult for many customers to ever pay down their mortgage – because the access to the HELOC is so tempting.
- A collateral mortgage will not allow any other Home Equity Line of Credit from another lender, even at a more competitive rate, on your home. No one else can lend on the value of your home in any case because the value is all tied up by one lender.
There are other easy ways to access the equity in your home without a collateral mortgage.
- Open a HELOC in second position (at an excellent interest rate).
- Refinance the mortgage during the term, without paying a penalty (called an increase and blend). Refinances result in much lower interest rates.
- Not a home related product, but you could also open a regular line of credit if you just need for emergency use. The rate may be slightly higher than a HELOC however if the regular line of credit is not used often, then rate will not likely come into play as much.
Bottom line is that the cost of a collateral mortgage far exceeds the costs, especially considering when you can likely get a better result, and a lower cost of borrowing using other mortgage strategies.
How to tell if you have a collateral mortgage
You can pretty easily future out of you are already in a collateral mortgage by:
- Contacting us at Altura for a free title search and home valuation on your home. We can usually determine if the mortgage was collateralized.
- If your mortgage statement says ‘HomeLine’ or ‘STEP’ or ‘PowerLine’ or if it is a line of credit and mortgage in one – then it is a collateral.
- Call your Bank to ask them if it is collateral. This just takes a few minutes.
How to get out of a collateral mortgage
At Altrua we have specialized programs available to get borrowers out of collateral mortgages at some of the lowest market rates. These programs are far better than the standard ‘mortgage refinance’ programs out there that carry substantially higher rates.
With our low rate programs, you may obtain a highly discounted – perhaps one of the best rates in the market, – but there is nevertheless a legal fee embedded in the new mortgage that needs to be accounted for..
The result is usually better – likely with thousands in savings from your current lender. But the extra cost, of approximately $800, is the price to pay to get out of the collateral. It will not have to be paid again one you are on the right track with your mortgage. Better to avoid this cost at the outset than to face a surprise on your renewal date.
If you do decide to go into a collateral mortgage, it is at least with a good knowledge of what it is. Most people will likely want to think twice but as a now educated consumer, the decision is now yours to make in a much better, more educated position.