Why should you care if your bank registered a standard charge mortgage or a collateral charge against title on your home when you bought? Did they even offer to provide one or the other? Most banks don’t and you can end up paying for it later. Let’s start with a quick explanation of both.
Standard Charge Mortgage
This is the classic way a mortgage has always been done. You request borrowing, your bank lends you 300k for your home with a set rate and they register 300k on title of your property. Nice and simple!
Pros:
· Easily transferable
· No legal fees to transfer (costs $30, so the lender just covers this)
· Makes getting the best rate at renewal an easy process (gives you bargaining power!)
Cons:
· If you refinance, a new charge must be registered, incurring a legal fee to do so
Collateral Charge
Welcome to the new common practice with many of the big banks that TD quietly rolled out first in 2010. Did you know many of the banks will only do collateral charge mortgages now? The reason being, simply put, is retention of your mortgage. You technically have a demand loan registered against your house, not a mortgage.
Pros:
· They can register a higher charge that does not go down against your home. For example, you take a 300k mortgage. They may register a charge for 400k against your home. This allows them to re-advance, at their own discretion, more money against your home with no legal fees if it falls below 400k in the future.
Cons:
· To move your mortgage now incurs a legal fee. A collateral mortgage is non-transferable so it must be discharged. This fee starts around $650 in Saskatchewan. Oh, did a mention you pay tax on that too?
· A demand loan means if you have a line of credit secured against your house your bank can change the rate at any time without explanation. The rate you sign up for and the rate you receive in the long run on variable rate products can change without explanation.
· 50% of the time your collateral charge must be re registered in the case of a refinance I find regardless of you having a collateral charge, which means you’re not saving the one thing you can save on, the legal fee.
· You must pay mandatory title insurance on your home when you purchase. The cost of this is based on the registered charge against your home. If your charge is now being registered for a 400k collateral charge when you borrowed 300k, your title insurance is now 25% more expensive.
So, what does it mean for you?
I’m going to use TD as an example here since they were the first bank to put this into common practice (although many of the other banks have switched to this now). If TD completed your mortgage, they now have a lot of power to ensure you receive above average mortgage rates on renewals, because they know it’s going to cost you money to transfer.
The pitch the bank is going to give you on this is that it’s easy to reborrow against your home in the future should you need to take equity out. There are more cases where this isn’t true then where it is. Again, they don’t even have to offer you best rates to reborrow against your home because of how they have your mortgage registered, they know you can’t go anywhere else for the money.
For example, you need to reborrow due to life circumstance, such as your wife being on Mat leave which has incurred some extra expenses. TD has a charge registered for 125% of your homes value and they won’t let you re-advance more funds because you don’t qualify with them while your wife is on Mat leave. Your broker has access to lenders that will! But, guess what. Since TD holds the right to all the equity in your home and then some, this isn’t available unless you break your entire mortgage and incur large penalty fees. They are effectively taking away the access to your own equity and it gives the bank leverage to overcharge you to use it.
The only time a collateral charge makes sense is when you are putting a Home Equity Line of Credit (HELOC) on at the same time as your mortgage. The collateral charge is commonly required to receive this product and always gives you access to your equity in your property. Otherwise you’re giving up flexibility to the bank for next to nothing in return.
The bank is good at making money, I’m sure we all agree on that. But most people don’t understand what they have traded off until years down the road when they signed up for the collateral charge. Most of the time the bank doesn’t even bring it up, or the person providing your mortgage doesn’t know what it means. Don’t get stuck.
Use a Mortgage Broker
A mortgage broker has access to ensure you’re getting the appropriate charge to allow for flexibility in the future for better rates and products. Don’t let the bank handcuff you to them with a collateral charge, it can cost you thousands of dollars throughout the lifetime of your mortgage. It’s about more than just an interest rate which, lets be honest, we’re still going to come out on top there too.