Collateral Charges- What the heck?

Mortgages are something that people rarely think about, unless they need one. So it is understandable that sometimes there is puzzlement in the minds of the average Canadian, when it comes to a lot of the terminology. Mortgage brokers can help their customersdissolve this language barrier and clear up the little details of a mortgage. For example, now there's a new concept to learn, Collateral Charges.

Now TD Canada Trust and ING have announced that they will now be immediately registering mortgages as Collateral Charges instead of registered mortgages. Wait, what?

First we will look at precisely what a Collateral Charge is. “It is a loan attached to a promissory note and backed by the collateral security on a property.” Right, clear as mud.

O.K let’s explain. There are 2 ways to register a mortgage. The first is the standard way, a mortgage registered with the land registry office. These mortgages can be transferred, discharged, or switched to another lender usually with a minimum $30 cost which many lenders pay as a part of their service.

The second way to register a mortgage, is under the Private Property Security Act, (PPSA), which can only be registered or discharged, not switched or transferred. The bank registers your collateral mortgage to 125% of your home’s worth. The concept is, if your home rises in worth and if you qualify under the institution’s lending guidelines, then it is easy to get at the extra cash without legal charges or evaluations. Sounds excellent, right?

So you walk into your local branch checking for a loan worth 75% of your home’s value. The bank gives you the money and immediately registers your new mortgage as a collateral charge. They register it at 125% of your home’s value , with the pull of quick money when you want it. The subsequent 2 years you become unemployed or your spouse goes on mat leave and you are having difficulty making ends meet. Maybe you have missed a payment or two. You contact the lender but due to damaged credit, don't qualify for the cash and are declined.

You contact another bank for the funds, but as the collateral mortgage is registered to 125% of the value and locked up by the original bank, your collateral is pointless. No lender can register secondary financing behind one that's worth more than the value of the house. It fundamentally means that in the event of default, he's left with nothing.

Your only possibility is to discharge the loan, and pay the prepayment penalties, legal charges and reviews. This is also setting you up for another pit. Your damaged credit will not permit you to get the best rates now either. This one seemingly minor mortgage decision finally ends up costing you $1000s.

Had you financed the loan at the original 75% there would be plenty of equity for a 2nd mortgage and your original rate of interest would have been protected. Nice huh?

Also the collateral charge is mostly charged at Prime + .10%, allowing the bank to charge what it wants when you go for the extra money. It has you now and will be more than pleased to offer you your money but at different rates and terms. Trapped? You sure are.

OK, so you are secure in your job and make decent money, so what is the problem. The negatives of a collateral charge mortgages include the handcuffing of all borrowers come renewal time. As a cautious and responsible consumer it is wise to search for the best rates. However if you'd like to shop for better rates at another bank be prepared. So as to move your mortgage to another establishment, you must still clear the existing mortgage totally and start from ground zero with new legal fees and reviews like you would with a new mortgage. In other words dish out an additional $1000, to $1500. Ouch.

So you the borrower, no longer have the leverage to agree rates due to the charges to move your business some place else. Do you really think your bank will politely offer you their best rate, knowing this? Not gonna happen. Liking that comfortable green chair now? You better, as they want your butt parked there for life.

Why do banks do this? (Hey it’s difficult to make record bn. dollar profits, ya ‘ know). They do so simply to maximise profits. The mortgage cash cow accounts for one third of their retail profits. Why not use the 65% of patrons who go to their bank for mortgage guidance. These folk, who incorrectly believe that their loyalty over time will be returned in kind, blindly sign the paper that is put in front of them. Why not exploit the situation, especially when the impact of this choice isn't known for years afterwards.

Going to a mortgage broker instead of directly to a bank can really make the difference. A mortgage specialist can talk over these details, and there is no secret agenda. They are working for you, and their business counts on you.

This is not new and banks have been getting away with this for a long time. Approximately 30% of customers just sign back mortgage renewal. Notices offer posted rates that are 1 to 1.5% over the market rates, without another thought. Small wonder Canadians are considered such nice respectful .

Steve Clark is a Mortgage broker with Northwood Mortgages. He keeps his clients recent with the latest mortgage reports by posting on his site georgianmortgages.com