When shopping for a mortgage you’ll probably ask about term, rate, payment frequency but you won’t ask if a “conventional or collateral “ mortgage is going to be registered against your property.
So what exactly is the difference?
CONVENTIONAL MORTGAGE -
When a conventional mortgage is registered you’ll know your payments, rate of interest, amortization period and when your mortgage will be paid in full.
For example if you purchased a property for $220,000 and had a conventional mortgage of $175,000 on a 5 yr. term rate of 4% amortized over 25 years your monthly payment would be $920.54 per month.
If all payments are made on time, the mortgage would be renewed in 5 years time subject to the then current interest rates (which would change your monthly mortgage payment). If no pre payments are made your mortgage will be paid in full in 25 years.
Normally the balance on a conventional mortgage only goes down (unless you refinance to take out equity in your home).
Other lenders will allow you to “transfer” or “switch” your mortgage to them at maturity at little or no cost to you. You can also have another lender approve a second mortgage (such as a Home Equity Line of Credit) and register this behind the other lenders first mortgage.
COLLATERAL MORTGAGE -
This type of mortgage is basically a promissory note or loan agreement secured by the collateral security of a mortgage against your home.
The lender can have you sign to have the mortgage registered for up to 125% of it’s value.
In the above example they would register a collateral mortgage for $281,250, but you’d only receive $175,000. The loan agreement would still indicate the actual loan amount, interest rate and monthly payments. The paperwork your lawyer registers may indicated an interest rate of anywhere from Prime plus 5 to 10%, allowing you to go back to the same lender and borrow more money (if they approve) without having to register another mortgage.
PITFALLS OF A COLLATERAL MORTGAGE -
Almost all other lenders will not “transfer” or “switch” a collateral mortgage. If you wish to change lenders you’d have to discharge your mortgage and pay the fees to have a new mortgage registered.
Lenders may use a right under Canadian Law called “offset” to utilize a collateral mortgage to pay out any other unpaid debts you have with them. If you have equity in your home and you have defaulted on another loan or credit card, the lender can increase your collateral mortgage and pay out this other debt.
If you wish to take out equity and this lender declines to do so, you would not be able to go to another lender for this loan as no other lender would be able to securitize their loan because of the registered amount of the collateral mortgage.
Some lenders are offering these in a “negative option billing” manner, so be aware that if you’re not informed you should ask if your being offered a collateral or a conventional mortgage
Be aware especially if you're shopping for a combo product where part of your mortgage is a Line of Credit that all of the major Banks register these as collateral charges.
Unfortunately these items are not usually disclosed to you at time of signing by your lending institution . It’s best to ask a lot of questions and have your lawyer review the paperwork before you sign on the dotted line.
