There has been a lot of talk about collateral or re-advanceable mortgages recently.
So what is a collateral mortgage? In reality they are a very common form of mortgage that generally includes a line of credit. The Financial Consumer Agency of Canada provides the following definition:
Collateral Charge (a.k.a ‘Credit-Master’ or ‘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, note that other lenders may not accept the transfer of your mortgage. This means you may need to pay fees to discharge your mortgage and register a new one in order to change lenders.
Switching your mortgage is not as difficult or nearly impossible as it once was as some lenders are now introducing programs that enable you to switch your mortgage over to them.
As of September 1st the major banks have added disclosures to their websites (although they are extremely difficult to find) and as January 1, 2015 the Department of Finance says that banks will start warning consumers about the implications of this type of mortgage compared to a standard mortgage.
This “All-indebtedness” mortgage brings any other debts that you have with your mortgage lender under the registered security of your real estate so if you want to payout your mortgage or try to transfer to another lender, they may require you to payout all of the other debts that you have with them including co-signed credit cards and loans, any unsecured lines of credit and even your car loan. You may perceive this as unrelated debt but it’s not. Your home is at risk for any other debt you may have with the bank or credit union that holds your mortgage.
You may want to read the paragraph above again. A more prudent approach is to not have your mortgage with the same institution that has your other financial business to reduce the risk involved with having a collateral mortgage and to avoid how far it can potentially reach and affect your overall finances.
My role as your mortgage broker is to ensure that my clients are placed with lenders that offer the most flexibility and options not just now but for their future needs. Collateral mortgages are becoming more common place and understanding them is very important. I recommend them for many of my clients but also provide them with the information required to make sure a collateral mortgage is in their best interest.
Your role is to have the conversation with your mortgage lender to fully understand the benefits and the potential limitations of a collateral mortgage.
April Dunn is a Mortgage Broker who has been assisting clients to purchase, refinance or renew their mortgages for over 20 years. April is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects and specializes in Strategic Mortgage Planning. April provides a full range of residential and commercial mortgage financing for clients all over the province of British Columbia and across Canada through the Mortgage Architects network. April can be reached at 250-826-3543 or april.dunn@mtgarc.ca