Collateral Charge Mortgage – a big deal
Collateral charge mortgage registration … is a big deal in most circumstances.
Short Version
- This is a method of registering your mortgage currently used by nearly every Chartered Bank / Big-6 Banks at this time.
- You are unlikely to avoid it if you are at a Big-6 Bank so it is important to 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 serious consideration. See the bold summary in the last paragraph below.
- Have your mortgage as a stand alone piece of a bank-relationship if you must place it with a Bank
- Ask about more information re ‘Monoline‘ lenders; broker lenders that do not register this way.
Long Version
The Financial Consumer Agency of Canada website provides the following definition;
Collateral Charge (a.k.a ‘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 other lenders will not accept the transfer of your mortgage. This means you may/ probably will need to pay fees to discharge your existing mortgage and register a new one in order to change lenders. The fee for this is the lawyer charge incurred.
The 1 Benefit:
The (potential) win for the client is avoiding new legal fees for securing a line of credit or increasing the mortgage balance in the future. This assumes 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 that was not the case and you chose to register the mortgage with a collateral charge lender for ONLY the mortgage amount then the upside is actually quite limited.
Some Of the Negatives:
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, also rare.)
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. Your choice of lenders is limited and the rate for this is not “best rates” as the new lender is paying for the cost of the change “under the covers.”
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 a policy that exists with nearly all Big-6 Banks, but NOT standard with Broker Lenders. 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.
What the Dept. of Finance said about it …
The Department of Finance -DoF – has noted that the Big-6 are NOT disclosing this clearly enough. This point alone should be the alarm. Here is what the DoF has said …
“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’
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.
CONTACT US
We answer from 9-9 x 365 and are the Top Calgary Alberta Mortgage Brokers. Call to discuss if you would like more on this.
Mark Herman, Calgary Mortgage Broker.
403-681-4376
Calgary Housing Market Still Strong
Below is an article that notes Calgary’s home prices are still supported.
Mark Herman, top Calgary mortgage broker for purchases and mortgage renewals
Calgary’s housing market is not under threat of a correction despite a downturn in the local economy, Canada Mortgage and Housing Corp. said in an analysis Thursday.
Its assessment of 15 metro markets lists Calgary as “low risk” while Toronto, Regina and Winnipeg were rated “high risk.” The review considered four factors — overheating; acceleration in house prices; overvaluation; and overbuilding — as of the end of March.
“The low price of oil has affected many different sectors of the economy, affecting employment and income growth, and increasing the unemployment rate. Weaker labour market conditions have also slowed migration to the region,” CMHC said of the Calgary-area market.
…
Meanwhile, Vancouver — one of the country’s priciest real estate markets — was deemed low risk, even as home prices there continue to soar. The benchmark price of a detached home in metropolitan Vancouver hit $1.1 million in July, up 16.2 per cent from a year ago, the Real Estate Board of Greater Vancouver said last week.
… Statistics Canada said Thursday that new home prices in the Calgary area rose 0.1 per cent in June.
“Higher land prices were largely offset by builders reducing prices because of market conditions,” the federal agency said. Prices were up 0.7 per cent year-over-year.
In its latest report, the Calgary Real Estate Board said the average MLS sale price for July was $476,446, down about 1 per cent from a year ago while the median price of $435.000 grew by 2.35 per cent. The benchmark price, which CREB identifies as a typical property sold in the market, was largely unchanged at $455,400.
With files from The Canadian Press
Calgary housing market a low overall risk of price delines
All the hot air about Calgary housing being over-valued looks to be hot air as CMHC’s report notes below.
Mark Herman, top Calgary Alberta Mortgage broker for renewals and new home purchases
Calgary housing market a low overall risk: CMHC
Calgary is at a low risk of a housing correction, says Canada Mortgage and Housing Corp. in an assessment of market conditions across the country.
Its House Price Analysis and Assessment, released Thursday, said Calgary has an increased risk of overvaluation, but is stable or unchanged in three other areas — overheating, price acceleration and overbuilding.
The report said declining sales in recent months — a reflection of lower oil prices — has pushed the city’s sales-to-new listings ratio to a buyers’ market.
“This is expected to place downward pressure on house price growth, which could lessen the current risk of overvaluation in Calgary,” the CMHC said. The threat of price overvaluation reflects strong growth in house prices and modest gains in personal disposable income.
“The economy is being impacted by lower oil prices and slower inflows of migrants that will likely contribute to an expected slowdown in the rate of price growth in 2015,” it said.
CMHC said Regina and Winnipeg were deemed the riskiest markets in the country…
Downtown living the ‘new normal’
This is more support for central/ down town condos in Calgary supporting their prices as more people move to the core to avoid the commute.
Mark Herman, Calgary Alberta mortgage broker
Downtown living the ‘new normal,’ report says
Employers move to urban cores to attract qualified workers, retail follows.
Homeowners choosing urban living over suburbia is a key trend in Canada’s real estate market and is helping drive both retail and commercial development in city cores, according to a report. …
“Younger workers in particular — though not exclusively — continue to flock to the urban core, preferring to work where they live, rather than take on long commutes,” the report says.
Members of the millennial generation are not the only ones giving up the more generous living space of suburbia for downtown living. Baby boomers with empty nests and the generation following the millennials, which the report calls “Generation Z,” are also joining the trend …
http://www.cbc.ca/news/business/downtown-living-the-new-normal-report-says-1.2815490
Interest rates expected to go up October 2015 says Bank of Canada
The Bank of Canada has updated when they plan to increase rates again … about a year from now – so next October? Expect rates to go up 1% then.
Mark Herman, top Calgary, Alberta mortgage broker
The central bank further pushed back the time frame for when it reckoned the economy would reach full capacity, to the second half of 2016 from the mid-2016 estimate in July. It also delayed by one quarter to the fourth quarter of 2016 the time when it expects total and core inflation to settle at its 2 percent target.
Here is the link: http://ca.reuters.com/article/businessNews/idCAKCN0IB1NY20141022
Alberta homes lead Canada for 2013
Alberta resale housing market tops Canada in annual sales growth
Forecast to lead the country again in 2013
CALGARY — Alberta will lead the country this year and in 2013 in the pace of growth in the resale housing market, according to a new forecast by the Canadian Real Estate Association.
The national association of realtors said Monday that Alberta MLS sales this year will finish up 13.1 per cent from last year to 60,800 transactions and sales will lead the country next year as well with 1.3 per cent growth to 61,600.
Nationally, sales are forecast to decline by 0.5 per cent this year to 456,300 and fall by another 2.0 per cent in 2013 to 447,400 transactions.
The average sale price in Alberta is expected to rise by 2.7 per cent this year to $363,100 and by another 2.3 per cent in 2013 to $371,300.
Across Canada, the national average sale price is forecast to increase by 0.3 per cent this year and next year to $363,900 and $365,100, respectively.
In November, Calgary MLS sales of 1,831 were up 10.6 per cent compared with last year while on the national level sales dipped by 11.9 per cent to 30,573.
The average sale price in Calgary rose by 3.8 per cent to $413,921 but fell by 0.8 per cent across the country to $356,687.
In Alberta, sales increased by 3.2 per cent to 4,034 transactions and the average price was up 4.3 per cent to $365,999.
“National sales activity has remained fairly steady at lower levels since mortgage rules were changed earlier this year, but that stability masks some real differences in trends among local housing markets,” said Wayne Moen, CREA’s president.
CREA on Monday also released its MLS Home Price Index of seven major Canadian markets. Regina’s annual price growth of 11.58 per cent led the nation followed by Calgary at 7.13 per cent.
The national aggregate price rose 3.5 per cent year-over-year, the seventh time in as many months that the year-over-year gain shrank and it marks the slowest rate of increase since May 2011.
Twitter:@MTone123
© Copyright (c) The Calgary Herald
Calgary – #1 for Real Estate Investment
Once again, Calgary has been ranked as the top real estate investment market in the country followed by Edmonton by the Real Estate Investment Network Ltd.
In its Top Alberta Investment Towns report, REIN said that Alberta’s economy has come out on top after a few years of economic turbulence.
The report identifies towns and regions poised to outperform other regions of the province over the next three to five years.
And none is better than Calgary.
“After a couple of roller-coaster years, Calgary is back on a roll. The return of jobs to the city, as well as greatly reduced office vacancy rates show us that the city’s short slump has come to an end,” said the report. “Recording a GDP growth of three per cent in 2011, and one of the lowest unemployment rates in the country, it’s no wonder Calgary is sitting as one of the top places in North America for property investors. When you combine the economic fundamentals, the population growth, and a burgeoning provincial economy, it is easy to see why so many businesses and people have come to call the city home.
“The market is hot. With the pressure on the resale housing market, there is similar pressure on the rental market. Inventory has dropped for rental accommodations while monthly rents have increased. Real estate investors and real estate agents are reporting that rental listings are being pounced on. Savvy investors purchasing units and advertising them for rent upon close are receiving calls from anxious tenants wanting to see the unit before the investor has possession and/or has done any improvements to the property. Rental sites are reporting difficulty in compiling statistics become some communities have nothing for rent.”
REIN said housing affordability will begin to be an issue in Calgary, with rents increasing and a high average sale price. But when you look at that price versus average income it shows that other cities in Canada have a much larger problem on their hands.
“Calgary has the long-term economics to support long-term market strength while other cities do not,” said REIN.
The Top Alberta Investment Towns ranked in order are: Calgary, Edmonton, Airdrie, Red Deer, St. Albert, Fort McMurray, Lethbridge, Grande Prairie, Okotoks, Leduc, Sylvan Lake and Lacombe.
The report said Airdrie has been one of the fastest growing communities in the province.
“Its proximity to the economic engine of Calgary and the growth of the surrounding economy will push the physical and economic growth limits of the city in the next decade,” said REIN.
“With increasingly easy access to many areas of Calgary via the ring road as well as the growth of job centres in and around the city, Airdrie property owners should continue to feel upward pressure on both rents as well as home prices. As affordable housing becomes a growing problem in Calgary, Airdrie will benefit from lower average house prices. As the office centre of the west, Calgary may offer employment opportunities that Airdrie does not, but much of the labour force will turn to Airdrie as a place to call home.”
REIN’s top Canadian investment cities ranked in order are: Calgary, Edmonton, Hamilton, Surrey, Maple Ridge and Pitt Meadows, Airdrie, Kitchener and Cambridge, Red Deer, St. Albert, Waterloo, Winnipeg, Saskatoon, and Halifax.
According to a research note by Scotia Economics, Alberta remains a key economic engine for Canada, with the highest provincial real GDP growth rate forecast for 2012 and 2013 at 3.4 per cent and 3.0 per cent respectively.
“The economy is growing strongly with contributions from consumer spending, business investment, particularly in the oilsands, and exports, which is encouraging given the strong Canadian dollar and soft global demand,” it said. “Provincial government spending also will continue to support growth, albeit at a slower pace than over the decade prior to the recession.”
In the second quarter of 2012, Alberta had a year-over-year population growth rate of 2.5 per cnet, the highest in the country.
“At this juncture, the federal government’s recent tightening of mortgage and home equity financing standards appears to have had a limited impact on Alberta’s housing market,” said Scotia Economics. “It continues to be supported by strong employment growth, significant wage gains and ongoing resource development.”
mtoneguzzi@calgaryherald.com
Why putting less than 20% down can lead to a better mortgage rate
This is true – the banks are sending us 2 rates … 1 rate for a CMHC/ Genworth insured mortgage and a slightly higher one for more than 20% down – or a conventional mortgage that is not insured.
The article below fully explains why.
By Garry Marr, Financial Post May 3, 2012
It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.
Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.
Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporation Canada Mortgage and Housing Corp.
“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.
The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to the Financial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.
Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages – loans with more than 20% down – because it was easier to securitize them.
However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.
“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”
“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.
“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.
“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”
But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.
Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.
While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.
It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.
It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?
More problems with collateral mortgages
Here is more bad news on collateral mortgages.
People refuse to sign a 3 year cell phone contract but then for some reason have no problem in losing every single thing you have ever made and be sued into bankruptcy by your bank for taking one of these mortgages. Again, we do not offer them but TD, Scotia, ING, and RBC have them as STANDARD. I would rather take a new 3 year cell phone contract!
Beware the pitfals of collateral mortgages
By Mark Weisleder | Sat Jul 30 2011
When you apply for a mortgage, you usually just ask about the term, amount, interest rate and monthly payment. Not many people understand the difference between a conventional mortgage and a collateral mortgage. Yet many banks are now asking borrowers to sign collateral mortgages — and it could result in them being tied to this bank, for life.
With a normal conventional mortgage you bargain for a set amount, rate and amortization. Say the property is worth $250,000 — you bargain for a $200,000 loan, at 3.5 per cent, a five-year term/25-year amortization, payments of $998.54 per month.
A conventional mortgage is registered against the property for $200,000. If all the payments are made on time, the mortgage is renewed on the same terms every five years and no prepayments are made, the balance is zero after 25 years.
Should another lender decide to lend you money as a second mortgage, there is nothing stopping them from doing so, subject to their own guidelines. Under normal circumstances the principal balance on a conventional mortgage goes only one way, down. In addition, banks will accept “transfers” of conventional mortgages from other banks, at little or no cost to the consumer.
A collateral mortgage has as its primary security a promissory note or loan agreement and as “backup,” a collateral security, being a mortgage against your property. The difference is that, in most cases, the mortgage will be for 125 per cent of the value of the property. In our example, the mortgage registered will be for $312,500. But you will only receive $200,000. The loan agreement will indicate the actual amount of the loan, interest rate and monthly payments.
The collateral mortgage may indicate an interest rate of prime plus 5-10 per cent. This will permit you to go back to this same bank and borrow more money from time to time, without having to register new security. The lender will offer you a closing service, to register the mortgage against your property, at fees that will be cheaper than what a lawyer would charge you. Sounds good so far, doesn’t it?
However, this collateral loan agreement has different consequences, which are usually not explained to the borrower.
• Most banks will not accept “transfers” of collateral mortgages from other banks, so the consumer is forced to pay discharge fees to get out of one mortgage and additional fees to register a new mortgage if they move to a new lender. Thus the bank is able to tie you to them for all your lending needs indefinitely because it will cost you too much to move.
• Lenders may be able to use the collateral mortgage to offset any other unpaid debts you have. Offset is a right under Canadian law that says a lender may be able to seize equity you have in your home, over and above the mortgage balance, to pay, for example, a credit-card balance, a car loan, or any loan you may have co-signed that is in default with the same lender. In essence any loans you may have with that lender may be secured by the collateral mortgage. Nobody goes into a mortgage thinking about default, but “stuff” happens in people’s lives and 25 years is a long time.
• Let’s say your house value is $200,000. A collateral first mortgage registered on the property is $250,000. The amount owing on the mortgage is $150,000. If you were to need an additional $20,000, but the lender declines to lend it for any reason, then practically speaking you won’t be able to approach any other lender. They will not go behind a $250,000 mortgage. Your only way out would be to pay any prepayment penalty to get out of the first mortgage and pay any additional costs to get a new mortgage.
• Let’s say your mortgage is in good standing but you default under a credit line with the same bank. The bank could in most cases still start default proceedings under your mortgage, meaning you could lose the house.
• Some lenders are offering collateral mortgages in a “negative option billing” manner. Unless you are informed enough to say you want a conventional mortgage, you will be asked to sign documents for a collateral mortgage.
I spoke with David O’Gorman, the president and principal mortgage broker with MortgageLand Inc. He tells me it is his duty under the law to ensure the “suitability” of any mortgage he arranges for a consumer.
He would be hard pressed to justify the recommendation of this type of collateral first mortgage to any consumer, without disclosing both verbally and in writing the points listed above, and he believes the consumer should have their own lawyer review everything before they sign.
Lending money to people without proper explanation of the consequences is wrong. The banking regulators need to look into this practice and stop it. In the meantime, do not sign any mortgage document without discussing it first with your own lawyer.
ING now has the evil & dirty collateral mortgage – like TD and RBC
Also see the article from earlier this year about TD and RBC offering the collateral mortgage – which is an “IOU” for every single $ you have. (http://blog.markherman.ca/2011/05/09/why-you-do-not-want-a-collateral-mortgage-from-td-or-rbc/ ) Essentially YOU give them the right to sue YOU into bankruptcy if they need to repo your house. All other standard mortgages in Alberta only allow the bank to take the house back. Another reason to use a broker that knows what they are doing. Do you really want to put it all on the line for no reason?
ING Direct goes collateral charge
ING Direct will move this month to register all new mortgages as collateral charge, following on the heels of TD and other lenders.
The change is set to take effect on Dec. 10, 2011, with the bank to make a formal announcement to the broker channel later this week.