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