Conventional or collateral: Mortgage renewal

When you are looking at buying a home or shopping around at your mortgage renewal time, it’s important to read the fine print on the mortgage approval and how it is registered.

Don’t just sign the documents and move on. Ask questions and if you don’t understand something, and make sure that it is explained so you are comfortable throughout the entire process.

Before you sign on any mortgage offering, make sure you get advice from a mortgage expert who understands the complexity of mortgages. Most people focus on getting the lowest interest rate and forget about the various terms and options. By asking questions, you will ensure that you are reducing your risk of paying unnecessary costs down the road.

One of the important questions you need answered is, how is the mortgage registered? Is it registered as a collateral charge, or a conventional (standard) charge?

Some lenders register all their mortgages as collateral, while others will give you the option only after you ask. Most lenders register their mortgages as conventional. With a conventional mortgage, the amount you are borrowing (property value minus down payment) is the amount that’s registered. With a collateral mortgage, the amount that’s registered is 125 to 150 per cent of the property value, and the lender has both a promissory note and a lien registered against the property for the total registered amount. For example, if your mortgage amount is $400,000, the lender will register $400,000 plus up to another $200,000, even though the borrower didn’t receive all of those mortgage funds. Collateral mortgages have been around for a while and are used when you have a home equity line of credit (HELOC or secured line of credit) which allows the balance of the loan to float up or down depending on the use by the borrower. Banks like BMO, CIBC, RBC and most credit unions like Vancity register their mortgages as collateral.

The advantage of a collateral mortgage is easy access to credit. Since the mortgage is already registered for a larger amount than you need, you can access additional funds in the future without any extra steps or legal fees. This is only beneficial if you are putting more than 20 per cent as a down payment, and as long as you maintain 20 per cent equity in your home, as you can only borrow up to 80 per cent of your property’s value as per government regulations. If you are buying a home with less than 20 per cent down, it doesn’t make sense to have your mortgage registered as collateral, since you won’t be able to refinance until you have at least 20 per cent equity in your home.

There are several downsides of collateral mortgages:

• Free transfers or switches to a new lender when your term is up aren’t usually available. Most other lenders don’t like the fine print and restrictions of collateral mortgages, and won’t accept them unless you are refinancing, which costs you legal and possibly appraisal fees.
• You could end up paying a higher interest rate at renewal. If your collateral mortgage makes it difficult to switch lenders at renewal, you don’t have the ability to shop around for the best rate. That could end up costing you more on your mortgage rate.

If your goal is to pay off your mortgage faster, then a conventional charge mortgage will suit you better. It will give you the option to move the existing balance to another lender at renewal time, without having to incur any legal and appraisal costs. It is important to leave your options open.

Obviously, it’s very important to know up front whether you are getting into a collateral mortgage or a conventional mortgage. Unfortunately, many people don’t realize they have a collateral mortgage until it comes time to renew, and they don’t have the flexibility that they need.

By understanding the difference between a conventional and collateral mortgage, you can ensure that you’re getting the mortgage that best fits your long-term goals.

As a professional mortgage expert, it’s my job to find the best mortgage for my clients, and explain every detail of the mortgage approval process so they are informed and happy with the decisions they make.