Many people are unaware that there are two basic types of mortgages: conventional and collateral. With a conventional mortgage, the amount you’re borrowing (property value minus down payment) is the amount that’s registered. But with a collateral mortgage, the amount that’s registered is 100-125% of the property value, and the lender has both a promissory note AND a lien registered against the property for the total registered amount. Most credit unions such as Vancity register their mortgages collateral while TD Canada Trust and ING Direct switched to collateral mortgages in 2010.
The advantage of a collateral mortgage is easy access to credit. Since the mortgage is already registered for a larger amount than you need to buy the house, you can access additional funds in the future without any extra steps or legal fees.
But there are also several downsides of collateral mortgages:
– Free transfers or switches to a new lender when your term is up aren’t usually available. Most other lenders don’t like the fine print and restrictions of collateral mortgages and won’t accept them unless they’re a refinance, which costs you legal and possible appraisal fees.
– You could end up paying a higher interest rate at renewal. If your collateral mortgage makes it difficult to switch lenders at renewal, you don’t have the ability to shop around for the best rate. That could end up costing you up to 1% more on your mortgage rate.
Obviously, it’s very important for you to know up front whether you’re getting into a collateral mortgage or a conventional mortgage. Unfortunately, many people don’t realize they have a collateral mortgage until it comes time to renew and they don’t have the flexibility they need. We would be more than happy to help make sure this doesn’t happen to you!