Category Archives: collateral mortgages

What You Should Know About Collateral Charge Mortgages

 

I recently had clients who were refinancing their mortgage completely reject a very attractive offering from one of the big chartered banks.

Their reasoning? All of this bank’s mortgages are registered as collateral charges, and all of their online research into this topic spooked them completely.

Over the years, dozens of articles have been written on the topic of collateral mortgages, often tending to a negative bias. But as Rob McLister once said, and I agree with him, “collateral mortgages shouldn’t be portrayed as a supreme evil of the mortgage universe, when in fact they offer advantages to some.”

One can present persuasive arguments in favour or against collateral mortgages. But this client’s response compelled me to revisit the topic with fresh eyes and offer an updated perspective.

Mortgage loans are typically registered as a standard-charge mortgage or a collateral charge mortgage. So, let’s explore both types…

What Is a Standard Charge Mortgage?

A standard charge only secures the mortgage loan that is detailed in the document. It does not secure any other loan products you may have with your lender. The charge is registered for the actual amount of your mortgage.

If you want to borrow more money in the future, you’ll need to apply and re-qualify for additional money and register a new charge. There may then be costs, such as legal, administrative, discharge and registration fees.

If you want to switch your mortgage loan to a different lender at the end of your term, you may be able to do so by simply assigning your mortgage to a new lender at no cost to you.

Monoline lenders such as MCAP, First National Financial, CMLS and others default to standard-charge mortgages, unless offering a product such as MCAP Fusion (which has a re-advanceable HELOC component)

What Is a Collateral Charge Mortgage?

A collateral charge is basically a method of securing a mortgage or loan against your property. As explained here previously, “unlike a standard mortgage, a collateral charge is re-advanceable. That means the lender can lend you more money after closing without you needing to refinance and pay a lawyer.”

You can keep re-using this charge, and a new charge will only be required if you want to borrow more than the amount that was originally registered.

Most chartered banks offer both types of mortgages. A couple (TD Bank and Tangerine)  only register their mortgages as collateral charges.

Most chartered banks also offer a type of combination home financing, which consists of a mortgage component and a line of credit component. (Actually there could be several components.) For example, the Scotia Total Equity Plan (STEP) mortgage.

If you have a Home Equity Line of Credit, you have a collateral charge mortgage.

A collateral charge can be used to secure multiple loans with your lender. This means credit cards, car loans, overdraft protection and personal lines of credit could also be included.

Arguments people make in favour of collateral charge mortgages

1) If you wish to borrow more money during the term of your mortgage, you can tap into your home equity without the expense of a mortgage refinance. You can save legal fees. (This is assuming of course, your personal credit and income are sufficient to qualify for more money.)

2) If you have a mortgage and a Home Equity Line of Credit (HELOC), it may be structured such that every time you make a mortgage payment, the amount you pay towards your principal balance is added to your HELOC limit. Large available credit, used wisely, is usually a good thing.

3) Collateral charges are often best suited to strong borrowers with lots of equity. They might readily access contingency funds at no cost down the road. This could be by increasing their mortgage loan amount or adding a home equity line of credit to the mix.

Ironically, our same clients who objected strenuously to the collateral charge actually fit this profile. After refinancing their current mortgage, they will still have $500,000 in equity left in their home. Who knows, down the road they may want a Home Equity Line of Credit or to increase their mortgage. If they register their mortgage today for more than its face value, they could avoid all refinancing costs at that time.

Arguments people make against collateral charge mortgages

1) Some people trash the collateral charge because there is often a cost to switching lenders at renewal. I think that’s overstated and no longer factual.

It’s so competitive out there, if you’re still considered strong borrowers, chances are someone is willing to eat the costs to move you.

Also, some lenders are now offering no-cost switch programs for collateral charge mortgages. That was not the case a few years ago, and the list of such lenders is growing.

And keep in mind the moment you wish to change any material aspect of your mortgage (for example, the amortization period or the loan amount), it is no longer considered a switch, but rather a refinance—so legal and appraisal costs are in play anyway.

2) Others argue you could be offered less competitive interest rates from your current lender at renewal than you will be from a new lender. Again, if you are a strong borrower, someone is going to offer you low rates, and your current lender, under pressure, will often match or beat competitive offers. For that reason I view this as less of a concern.

3) Some lenders register a collateral charge for more than the loan amount—to as much as 125% of the appraised value of your home. Some just do this by default and others may ask you to choose the dollar amount to be registered. The rationale being you will retain the benefits of your collateral charge, even as your home increases in value.

This is where you might pause to reflect.

If, down the road, your personal finances take a U-turn, or you no longer qualify for additional financing with your current lender, then you might find a high collateral charge impairs your ability to seek secondary financing elsewhere.

For example, we are presently working with two Ontario-based clients who need a private second mortgage, but the collateral charge registered against their home is roughly the same as the value of their home. Even if their current mortgage balance is very low, unless a private mortgage lender’s lawyer can cap the collateral charge at that lower balance, these homeowners will find alternate lender sources are unlikely to lend new money.

4) A collateral charge mortgage is not only a charge on your home, but can include other credit you have with that same lender. These lenders have a “right of offset,” meaning they can collect from the equity in your home on any financial products you have (or co-signed for) that are now in default.

There is also the potential that when asked to pay out the mortgage at the time you leave your collateral charge mortgage lender, they can also add in overdraft, credit card and line of credit balances. Resulting in less funds to you than you expected and may need.

That said, it is unclear how often this happens, if ever, to borrowers with spotless records.

Industry insider Dustan Woodhouse points out, “(Even) co-signing a credit card or car loan for somebody (who then stops making payments) carries a risk of a foreclosure action against your property as a remedy for what was perceived to be an unrelated debt.”

The Wrap

Collateral charge mortgages are here to stay. More lenders are adopting them and you should have a good understanding of what type of mortgage you are being offered. Most of the time, it probably will not matter much to you how your mortgage is registered.

For all the arguments about extra costs if you wish leave your lender at renewal, as long as your borrower profile is strong you should be able to avoid any incremental out-of-pocket costs.

But if you want to take a conservative approach, consider the following:

Choose a standard charge mortgage if it really bothers you, and if you have a choice of lenders.

Or, when given the option, just register the collateral charge mortgage for the actual face amount of the mortgage, rather than a much larger amount.

In closing, Woodhouse has some sage advice: “It is perhaps a key consideration that one should in fact not have all their banking, credit cards and small loans with the same institution as their mortgage…mortgage with Lender A, consumer debt/trade lines with Lender B, and perhaps any business accounts with Lender C.”

Source: Canadian Mortgage Trends – ROSS TAYLOR  

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De-mystifying mortgage penalties

Research has shown that over 83 per cent of people break their mortgages early, resulting in their incurring hefty mortgage penalties that sometimes far exceed the annual interest on a mortgage. People break their mortgages early for several reasons, including relocation, the end of a marriage relationship, loss of a job, to take equity out to invest elsewhere and for many other reasons. A mortgage penalty is a fee built into the contract to prevent or make it difficult for you to break the mortgage, in addition to compensating the provider for the loss of interest income. Different mortgage providers calculate the penalty in different ways, which is why it is always a good idea to shop around before settling on one particular provider. Also crucial is ensuring that you read the fine print before signing the mortgage document, so that you have an idea of the penalties (if any), that you are likely to incur in the event that you break the mortgage.
How mortgage penalties are calculated
Traditionally, banks and other lenders have used two main methods to calculate mortgage penalties. This means that in the past, you were assured of paying a standardised penalty depending on which method the bank used. As a rule, you could then expect to pay the greater sum calculated under the following methods:
The three month interest method: Here, you basically calculate the interest due on your next three mortgage repayments and pay the three month total.
Interest Rate Differential (IRD): The IRD is calculated by multiplying your mortgage balance by the difference between your original mortgage interest rate and the current interest rate that the lender can expect to charge upon reselling the mortgage.
The first method has typically been applied on variable rate mortgages, while fixed rate mortgages would use the ‘higher amount’ rule where they pick the larger sum depending on which method is used to calculate the penalty figure. However, with the advent of new mortgage lenders with cheaper interest rates and friendlier lending terms, banks have taken steps to reinforce their customers; including changing the way the IRD is calculated. Today, for instance, you may find that your prepayment penalty is calculated in the following ways:
  • Using posted rates as opposed to discounted ones, which significantly increases the penalty.
  • Basing their penalty calculations around a variety of factors including bond rates.
  • Rounding off to the next longest remaining mortgage term, and many others.
What this means for you as a customer is that your mortgage penalty is likely to be extremely high, or you may find yourself stuck with your current mortgage provider in order to avoid incurring an exorbitantly high penalty. Unfortunately, unless you are an insider in the mortgage industry, you may also find yourself unable to calculate the rate personally, forcing you to rely on the formulas that your lending partner has come up with. Fortunately, there are ways to avoid finding yourself in this situation or at least significantly reduce the penalty you pay to your mortgage lender.
How to protect yourself from high penalties
Whether you are just starting to shop around for a mortgage or are looking to offload a current one in favour of a friendlier option, the following strategies can help you avoid paying a hefty penalty:
  1. Read your mortgage contract thoroughly: Take time to completely go through your contract before signing the document. Ensure you find out exactly what penalty you will be expected to pay in case you decide to break your contract early. Ask your mortgage agent to clarify how the penalty will be calculated and if possible, have a lawyer or other mortgage professional go through the document with you. Make sure to seek clarification on terms you do not understand and ensure that you are clear about any other costs associated with breaking your mortgage early. Ensure to read the fine print and only sign when you are completely satisfied with the terms of the mortgage.
  1. Understand, and take advantage of pre-payment clauses: Pre-payment clauses allow you to pre-pay up to 20 per cent of the balance of your mortgage annually without incurring a penalty. Pre-paying your mortgage allows you to significantly reduce the amount of your mortgage so that you can decrease the penalty you have to pay for breaking the contract. In addition, you can often take advantage of the end and beginning of a calendar year to double your prepayment in order to bring the mortgage balance down even further. For example, you could pay the first instalment at the end of December, and the other as soon as the financial year begins in January. Pre-payment allowances can vary from lender to lender so ensure you understand what options you have.
  1. Ensure that the contract allows you to break your mortgage: One of the most crucial things to look out for before signing the mortgage contract is whether the lender will allow you to break the contract early. Some lenders have clauses built into the contract prohibiting you from breaking it early and ensuring that you pay a very hefty penalty in the event that life circumstances force you to break it unintentionally. Sometimes, these types of “restrictive” mortgage products can come with lower rates. These lower rates are to make up for the fact you can’t break the mortgage early! These lower rates can be tempting, but without having a complete understanding of the mortgage product and it’s restrictions, they can lead to an unfortunate surprise down the road should you decide to break your mortgage early.
  1. Enlist the help of the Ombudsman for Banking Services and Investments Office: While IRDs remain unregulated for now, consumers with valid complaints may still enlist the help of the OBSI office if they feel that their penalties are too punitive. If you have been unable to successfully negotiate a reduction of the mortgage penalty with your mortgage lender, you can get some help from the OBSI, and even get part of the penalty reimbursed if the office rules in your favour.
  1. Learn how to calculate the penalties yourself: Educate yourself about how the various penalties are calculated in order to avoid situations where your mortgage lender rips you off because you are uninformed. As a rule of thumb, variable rate mortgages will use the three-month interest method, while fixed term mortgages will use the IRD. If you are still unsure on how to go about it, contact a trusted mortgage professional who will be happy to help.
Taking out a mortgage is a great way to get a place to call a home or premises to conduct your business. However, changes in life circumstances, the desire to move somewhere else, or simply wanting to access additional equity can force you to break your mortgage contract early, resulting in hefty penalties from your mortgage lender. Canadian mortgage laws are yet to regulate how the mortgage penalties are calculated, which means that many people find themselves at the mercy of mortgage providers as far as penalties are concerned.
Fortunately, there are a few steps you can take to protect yourself from hefty penalties or at least significantly reduce the amounts you pay upon breaking your mortgage. With a little research, you should be able to discover the methods that work best for you. A mortgage loan will likely be the biggest debt you incur in your life and it’s very important to ensure you have a good understanding of the mortgage product’s terms and conditions. Most importantly, ensure to work with a trusted mortgage professional who can help explain the terms of your mortgage commitment to you, and address your concerns about the associated penalties should you decide to break the mortgage down the road.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage.

Source: WhichMortgage.ca – By Dan Caird  24 March, 2017

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…mortgages made simple…

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THE RAY C. MCMILLAN ADVANTAGE

The Ray McMillan Mortgage Team  is licensed through Northwood Mortgage Ltd. We deal with major banks, trust, life insurance, finance companies and private lenders. We are licensed to provide the most competitive mortgage rates and terms available for your real estate financing needs throughout Ontario.

OUR SERVICE INCLUDES:

 

  • First and second mortgages
  • Transfers
  • Condominium/Townhouse purchases
  • Home Improvement Loans
  • Construction Loans
  • Debt Consolidation
  • Refinancing
  • Power of Sale
  • Multi-residential
  • Vacant land
  • Cottages and recreational properties
  • Rural and farm properties

 

 

ARE THERE ANY COSTS INVOLVED?

When we arrange a prime residential first mortgage the lender pays us a finder’s fee.This does not affect the rate our terms of the mortgage in any way.

When we arrange any other type of mortgage that does not qualify as a prime residential mortgage then the lender does not pay us. We must then charge a brokerage fee*. The fee is based on the complexity involved to arrange the mortgage.

any-questions

You have mortgage questions, the Ray McMillan Mortgage Team has answers.

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TD under pressure for collateral mortgage


Source: Mortgage Broker News

by Justin da Rosa | 09 Apr 2015
In what brokers hope is a precedent, media pressure appears to have saved a borrower from the hefty discharge costs associated with a collateral mortgage.

“We asked TD to remove the $946,000 lien, but were told to hire a lawyer,” homeowner Shawn Aberle told the Toronto Star. “We found it unfair the problem was back on us and it wasn’t the bank’s problem to lower the lien amount.”

Aberle and his wife took out a $612,500 mortgage and line of credit with TD Bank, and allege that unbeknownst to them, the bank registered a collateral charge totalling $946,000.

And when health issues forced Aberle out of his job, the couple didn’t qualify to access an additional $50,000 in borrowing. Still, banks continue to tout the readvanceable nature of collateral charge mortgages as a major benefit for clients.

“Collateral mortgages provide our customers with flexibility when they need access to affordable credit,” TD spokeswoman Alicia Johnston told the Star. “And may allow customers to avoid additional registration costs when increasing or refinancing a mortgage or with future borrowing.”

However, the Aberles faced challenges when their income profile changed due to the illness.

As is too often the case, say brokers, Aberle had, in fact, been approved for financing from an alternative lender contingent upon the lien being lowered.

Aberle credits Toronto Star columnist Ellen Roseman for TD Bank agreeing to discharge the lien.

“Your name gets things popping,” he said after she had contacted TD Bank.

Collateral charges at TD have won the bank other negative media attention.

CBC’s Marketplace recently went undercover to TD Bank to see how transparent it was about collateral mortgages and the fine print associated with them.

In a follow-up to an original segment about collateral charge mortgages at the bank – which resulted in the major banks promising to be more up-front about the associated stipulations – CBC went undercover to two different TD branches to see how well its mortgage specialists explain the fine print and to “test” the bank’s promises.

At the first branch, the undercover journalist asked the specialist if there was any difference between a TD mortgage – which includes a collateral charge — and one offered at other banks. The specialist failed to mention anything about collateral charges.