This is an excellent blog post by my colleague on the west coast, a very well respected mortgage agent, Dustan Woodhouse.
- This is a method of registering your mortgage currently used by nearly every Chartered Bank & Credit Union at this time.
- You are unlikely to avoid it with either of these two types of lenders, nor should you necessarily be concerned about doing so if you understand the ramifications.
- Avoiding having your mortgage held by the same institution as the balance of your debts such as; credit cards, over drafts, unsecured credit lines, car loans, etc. This is worth consideration.
- Place your mortgage as a stand alone piece of a relationship if you must place it with a Bank or Credit Union.
- Ask your Broker for more information re ‘Monoline‘ lenders. A group that does not register in this fashion.
The Financial Consumer Agency of Canada website provides the following definition;
Collateral Charge (a.k.a ‘Credit-Master’ or ‘All-indebtedness’) – A type of mortgage whose features may include the ability to potentially borrow additional funds, subject to your lender’s approval, without the need to discharge your mortgage, register a new one and pay legal fees. If you want to switch your existing mortgage to a different lender at the end of your term, note that other lenders may not accept the transfer of your mortgage. This means you may need to pay fees to discharge your mortgage and register a new one in order to change lenders.
True there are a few benefits. However, the is a bit more to it than this.
Perhaps most notably;
The (potential) win for the client that there are no new legal fees for securing a line of credit or increasing the mortgage balance in the future. (assuming the choice was made to register the mortgage for either the ‘125% of the value‘ option or a maximum amount greater than the actual mortgage amount). If the client chooses to register their mortgage with a collateral charge lender for ONLY the mortgage amount then the upside moving forward is actually quite limited.
Some negatives for the client;
The ‘all indebtedness’ mortgage brings any other debts held by that specific lender under the umbrella of the registered security against the Real Estate. In other words 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. Read that last sentence again. Yes your home is on the line for any other form of debt held by the same institution as your mortgage.
It is also (potentially) costly to transfer the mortgage to a new lender come renewal, in particular if the mortgage balance is under $200,000. However the topic of transferring 2, 3, or even 5 years down the road is less pressing. I would suspect most readers are still wrapping their heads around the concept of a $5,000.00 Visa balance potentially triggering a foreclosure action – which it very well can. (I have seen this occur in the case of two clients, admittedly 2 of 831.)
Transfer costs are becoming less of an issue as we currently have at least two lenders stepping up to offer a ‘no-fee switch’ program for collateral charge mortgages at renewal time. Still a limited choice to be sure.
Following is the key point around this topic, in my opinion;
Yes, this is a far reaching method of registration with serious ramifications. However as nearly all institutions (most likely the clients current bank as well) now register in this fashion 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. Rather splitting accounts between two separate institutions, and ideally having their mortgage held with a third financial institution is altogether more prudent. Think ‘Church & State’. Mortgage with Lender A, consumer debt/trade lines with Lender B, and perhaps any Business accounts with Lender C.
If all banking as done at ABC bank, and the mortgage is placed with XYZ lender we then eliminate exposure to the potential darkest side of a Collateral Charge mortgage. The Collateral Charge itself is not an evil thing, it is simply a policy that exists with nearly all Financial Institutions’ It is designed, as one may expect, to protect the interests of the Financial Institution over and above those of the clients. Once aware of theses potential ramifications one can then structure their finances in such a way that the reach of a collateral charge is in fact quite limited.
2. The Lender registering a collateral charge.
The case seems quite clear for a lenders love of this format. They are unlikely to change it anytime soon. More likely the balance of lenders will adopt this same program over the coming years.
Lenders are under increasing pressure to disclose the details around this topic more clearly, here is an excerpt from the DoF site;
‘While many consumers continue to choose a traditional mortgage to secure their home loans, many are increasingly choosing collateral charge mortgages. The impacts of having a collateral charge mortgage may differ from traditional mortgages. For instance, switching between lenders may be more difficult. To make an informed choice, consumers need sufficient information to clearly understand the costs and consequences of collateral charge mortgages relative to traditional mortgages. The Government will require enhanced disclosure, better equipping borrowers to understand these impacts’
3. The Broker’s perspective
- Worrying about switching a client out to a new lender 3-5 years later should arguably be a very low priority for the Broker.
- The highest priority is always to place a client with a lender whose programs and policies offer the greatest range of options over the long term (i.e. 10-15 years). This is always my ow primary focus. Clients best interests First!
- This topic deserves more attention than it typically gets at the time of the initial mortgage planning, please take a few minutes to discuss it.
Collateral Charge products are here to stay, understanding them and using that understanding to your benefit is your, and your Mortgage Brokers, responsibility. –