Collateral Charges- What are they?

by Steve Clark on February 8, 2012

Mortgages are something that folks don’t usually think about, unless they require one. So it is rational that occasionally there's confusion in the minds of the average Canadian, when it comes to a bit of the language. Mortgage brokers can help their clients get through this language barrier and clarify the idiosyncrasies of a mortgage. For example, now there is a new idea to learn and understand, Collateral Charges.

Recently TD Canada Trust and ING have claimed that they’ll now be automatically registering mortgages as Collateral Charges rather than registered mortgages. Wait, what?

First we must look at exactly 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.

Okay let’s explain. There are 2 procedures 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 typically with the minimum $30 cost which many lenders pay as a part of their service.

The other 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 property’s value. The idea is, if your property rises in price and if qualify under the institution’s lending regualtions, then you can get at the additional money without legal costs or appraisals. Sounds great, right?

So you walk into your home branch looking for a loan worth 75% of your home’s worth. The bank gives you the money and instantly registers your new mortgage as a collateral charge. They register it at 125% of your home’s value with the attraction of easy money when you require it. The next 2 years you lose your job or your partner goes on mat leave and you are having trouble getting by. Perhaps you have missed a payment or 2. You contact the bank but due to damaged credit, do not qualify for the money and are turned down.

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

Your only option is to discharge the loan, and pay the prepayment penalties, legal fees and assessments. This is also setting you up for another set back. Your damaged credit will not permit you to get the greatest rates now either. This one apparently minor mortgage decision finally ends up costing you $1000s.

Had you sponsored the loan at the original 75% there would be masses of equity for a second mortgage and your original interest rate would’ve been protected. Great eh?

Also the collateral charge is usually charged at Prime + .10%, permitting the bank to charge what it wants when you go for the additional money. It has you now and should be more than happy to give you your cash but at different rates and terms. Handcuffed? You sure are.

O.K, so you are secure in your job and make good money, so what is the problem. The negatives of a collateral charge mortgages include the handcuffing of all borrowers come renewal time. As a careful and responsible patron it is sensible to look for the most reasonable rates. However if you want to go shopping for better rates at another bank be prepared. In order to move your mortgage to another bank you have to still finish paying the present mortgage completely and start from scratch with new legal charges and appraisals like you would with a brand new mortgage. To explain dish out an additional $1000, to $1500. Ouch.

So you the borrower, have lost the leverage to arrange rates because of the fees to move your business somewhere else. Do you think your bank will just offer you their best rate, knowing this? Think twice. Liking that plush green chair now? You better, as they need your butt parked there for life.

Why do banks do this? (Hey it’s not easy to make record bill dollar profits, ya ‘ know). They do so simply to maximise profits. The mortgage money pump accounts for a third of their retail profits. Why not take advantage of the 65% of consumers who go to their bank for mortgage information. These people, who believe wrongly that their fidelity over time will be returned in kind, blindly sign anything that is put in front of them. Why not exploit them, especially when the impact of this choice isn't seen for years later.

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 isn’t anything new and banks have been getting away with this for a while. Roughly 30% of clients just sign back mortgage renewal. Notices offer posted rates that are 1 to 1.5% over the market rates, without a thought. No wonder Canadians are regarded as such nice polite people.

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

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