When shopping for a mortgage you’ll probably ask about term, rate, payment frequency but you won’t ask if a “conventional or collateral “ mortgage is going to be registered against your property.
So what exactly is the difference?
CONVENTIONAL MORTGAGE -
When a conventional mortgage is registered you’ll know your payments, rate of interest, amortization period and when your mortgage will be paid in full.
For example if you purchased a property for $220,000 and had a conventional mortgage of $175,000 on a 5 yr. term rate of 4% amortized over 25 years your monthly payment would be $920.54 per month.
If all payments are made on time, the mortgage would be renewed in 5 years time subject to the then current interest rates (which would change your monthly mortgage payment). If no pre payments are made your mortgage will be paid in full in 25 years.
Normally the balance on a conventional mortgage only goes down (unless you refinance to take out equity in your home).
At maturity other lenders will allow you to “transfer” or “switch” your mortgage to them at no cost to you.
You can also have another lender approve a second mortgage (such as a Home Equity Line of Credit) and register this behind the other lenders first mortgage.
COLLATERAL MORTGAGE -
This type of mortgage is basically a promissory note or loan agreement secured by the collateral security of a mortgage against your home.
Several lenders will offer you the ability to have your mortgage registered for up to 125% of it’s value.
In the above example they could register a collateral mortgage for $275,000 ($220,000 x 125%) but you’d only receive $175,000.
This does allow you to go back to the same lender and borrow more money (up to the registered limit - (if they approve) without having to register another mortgage.
PITFALLS OF A COLLATERAL MORTGAGE ............
When your mortgage term is over (i.e. after the 5 yr. term) most consumers have the opportunity of "switching" their mortgage from lender to lender for a better interest rate, but only if it is registered as a conventional mortgage.
1. - Lenders will not “transfer” or “switch” a collateral mortgage!
If you wish to change lenders you’d have to discharge your mortgage and pay the fees to have a new mortgage registered therefore nullifying your power as a consumer to shop and obtain a more competitive rate than your existing lender is offering you.
2. - Lenders may also use a right under Canadian Law called “offset” to utilize a collateral mortgage to pay out any other unpaid debts you have with them. If you have equity in your home and you have defaulted on another loan or credit card, the lender can increase your collateral mortgage and pay out this other debt.
3. - If you're wanting to refinance your mortgage to consolidate debts and/or renovate your home etc, and this lender declines to do so, you would not be able to approach another lender.
Why?, because if your lender has secured your home via a collateral mortgage there is no equity available to secure your loan request.
Always be sure to ask if your being offered a collateral or a conventional mortgage!
If you're shopping for a combo product where part of your mortgage is a Line of Credit all of the major Banks register these as collateral charges.
Unfortunately this important factor is usually not discussed or disclosed to you at time of signing by your lending institution .
It’s best to ask a lot of questions and have your lawyer review the paperwork before you sign on the dotted line.