Client surprised by collateral charge mortgage requalification

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Collateral charge mortgages are often criticized for the barriers they place on client's ability to port their mortgage but one broker was frustrated when his client was forced to re-qualify with the same lender to access the collateral loan.

“One of my clients had to requalify for the extra 25 per cent collateral and the lender wanted all the paperwork done all over again to prove income,” Domenic Luciano of Verico Premier Mortgage Centre told MortgageBrokerNews.ca. “They forced him to do the whole process over again.”

According to Luciano, his wealthy client had $1.9 million in equity in his $2.6 million home and he wanted to access the collateral loan to send his kids to school. The original lender wanted his client to pay a blend and extend fee as well as a new registration fee to requalify for the mortgage.

The Department of Finance requires lenders to provide more disclosure for collateral charge mortgages than traditional mortgages. The website reads:

While many consumers continue to choose a traditional mortgage to secure their home loans, many are increasingly choosing collateral charge mortgages. The impacts of having a collateral charge mortgage may differ from traditional mortgages. For instance, switching between lenders may be more difficult. To make an informed choice, consumers need sufficient information to clearly understand the costs and consequences of collateral charge mortgages relative to traditional mortgages. The government will require enhanced disclosure, better equipping borrowers to understand these impacts.

Yet, according to Luciano, he – and the client – were caught off-guard when the lender forced the client to requalify.

Eventually Luciano rectified the situation by placing the mortgage with another lender.
 
  • Albert on 2014-07-07 11:39:48 AM

    Collateral Charges allow the Lender to 'lend' more money to the client (usually at a future point in time) subject to the client qualifying for the increased amount. The broker needs to understand the difference between registering a collateral charge and borrowing/qualifying against the collateral charge.

  • Gershon on 2014-07-07 11:47:46 AM

    If the client is looking to increase his mortgage amount it is reasonable for the lender to requlaify.

    The advantage of a collateral charge in this case is that the client can save the legal fees if the new mortgage amount is equal to or less than the registered charge amount.

  • Mike Rice on 2014-07-07 11:48:25 AM

    I don't understand what the problem is?? FIs have to re-establish security value and ability to pay before advancing new funds.

  • Nick on 2014-07-07 12:05:27 PM

    Just because he has a collateral mortgage registered for more than his original mortgage amount doesn't mean he can afford the payments on a larger mortgage. Seems pretty normal that the lender needs to re-qualify the client to ensure he can afford the larger mortgage.

    As Gershon has already stated, the benefit to the client is that he does not need to re-register a new charge which will save him legal fees.

  • John Van Driel on 2014-07-07 12:07:15 PM

    One of my biggest beefs is when a client ends up with a collateral mortgage, and has no clue that he has one. This happens quite frequently, when there is no mor mortgage broker involved, and smaks of unethical behaviour, especially by large banks!!

  • Okanagan Broker on 2014-07-07 12:19:01 PM

    What? Like Mike says...You borrow more money you have to re-qualify...You want open access to your equity you arrange a HELOC initially. Then it says he rectified the situation by placing client with another lender? No offense, but client would have to "re-qualify" with another lender as well...somebody here seems to be lacking the basic knowledge of credit. How is this even newsworthy?

  • Mo on 2014-07-07 1:20:39 PM

    Often, the legal fee is negligible when it comes to a collateral mortgage (especially in this case). The collateral charge also creates unnecessary confusion.
    In my opinion, collateral mortgages should be eliminated because the collateral charge is (often) just another encumbrance/impediment on the borrower, as it limits the portability (choices) for the borrower/client.

  • Mo on 2014-07-07 1:20:40 PM

    Often, the legal fee is negligible when it comes to a collateral mortgage (especially in this case). The collateral charge also creates unnecessary confusion.
    In my opinion, collateral mortgages should be eliminated because the collateral charge is (often) just another encumbrance/impediment on the borrower, as it limits the portability (choices) for the borrower/client.

  • Angela Wong-Liao - Invis Inc on 2014-07-07 5:18:36 PM

    As a former banker, I can fully understand why the lender has to re-qualify the client if he would like to increase his mortgage amount or HELOC, the ONLY benefit for Collateral mortgage charge is to save legal fees should the client need to access more funds. Frankly, I do not see any issue in this case if the existing lender wanted to re-qualify the client as his debt load will increase.

  • Ottawa Broker on 2014-07-07 7:36:26 PM

    The problem here is that lenders, bank reps, and yes, brokers are selling it as a preapproval for the max amount which is not true.
    Then the client gets pissed when they have to meet the qualification requirements all over again.
    The ONLY advantage to a collateral mortgage is the savings in legal fees if the client refinances earlier, otherwise, all the benefits are to the lender, NOT the client. It is all there in black and white.

  • Mo on 2014-07-07 11:59:45 PM

    Good points by Ottawa Broker, Angela and a few others. On second thought, I think a middle ground would be the best approach. In other words, it would be optimal, if ALL lenders offered all clients a choice: Collateral mortgage or NO collateral mortgage.

  • M. Robertson on 2014-07-08 3:19:37 PM

    WOW... this is just another example of a broker who does not fully understand credit adjudication... and that in itself is very scary considering that he is advising consumers on mortgage lending.

    Mo... if the lender says: we only registered collateral charges, well then that is what they do. The consumer and the broker both have choice - use that lender or not.

    People need to stop making it out like lenders are all evil... This is just another story in a long list where brokers are attacking lenders... who for the record are vital to the survival of... guess who? BROKERS.

  • Mo on 2014-07-08 7:54:17 PM




    WOW! You are WRONG M. Robertson! First of all, I studied and learned about collateral mortgages when they FIRST became available to me!

    At the time, many people in the industry did not even know or understand what the collateral charge was. Some people still do not fully understand the collateral charge and this has created a lot of confusion.

    You obviously MISUNDERSTOOD my final point. My final point was that the more choices for the client the BETTER. However, if a certain bank(s) does not offer any non-collateral mortgages then it is THEIR RIGHT TO DO SO!

    Again, my point is this: the more choices for the client, the better. I'm NOT advocating that anyone force any bank to offer a non-collateral choice!

    In my experience, I have not signed up one client for a collateral mortgage yet because none of them have decided to take the collateral mortgage after I have educated them on the pros and cons of the collateral charge. Nonetheless, I am still open to providing a collateral mortgage for a client if the say YES to the collateral charge, only after they have been fully educated on the collateral charge mortgage. It has not happened yet.

    Finally, I'm not sure if you are lumping me in to that category people who are "making it out like lenders are all evil." But, if you are lumping me in to that category, then you are wrong again. I do NOT think banks are evil, but I always instruct my clients to read the fine print and I encourage them to ask questions if they are unclear about anything. Cheers.

  • Mo on 2014-07-09 1:23:15 AM

    M. Robertson. It has been a long & tough day. Initially, I read your post too quickly. Later on, I had chance to reread your post and I realized that you probably did not intend to direct anything in your post directly at me. And, initially, I could have made my point a little more clear. Therefore, I want to apologize for the strident tone in my response. Forgive me. Cheers.

  • M. Robertson on 2014-07-09 2:59:32 PM

    Mo, no worries. The only comment directed at you was the comment regarding choice. Yes, it would be optimal if all lenders offered the choice, but our reality is that they do not.

    Thus, as brokers and consumers, the choice has been given to us. To use a lender that only provides collateral charges as an option... or not to use them.

    The comment regarding the attack on lenders is a general one. Too often in the forums on this and other sites are lenders painted as great monstrosities that are hurting the consumer and brokers.

    This sort of lender bashing is unprofessional and does a great disservice to our industry - it is after all these lenders that provide us with the product we sell to consumers.

    Without product, we do not have a business.

    Yes... there are consumers that would still prefer to deal with brokers - there is no doubt. If the broker had nothing to offer them... well that consumer would go direct to a lender. After all, they still want to buy a house, refinance, etc. They are not reliant on the broker for that product, they choose to go down that path. If that path is no longer available, they will simply walk a different one that will still enable them to achieve their own goals.

    Over estimating one's own value is very dangerous. One must be very careful not to bite the hand that feeds it. We need the lenders as much, if not more, than they need us.

  • Bill F on 2014-07-10 1:48:19 PM

    There needs to be a recognition that there is a product difference between a mortgage secured by a collateral charge and a line of credit secured by a collateral charge.
    Any increase to a mortgage secured by a collateral charge will normally require re-qualification including income/credit and perhaps even an up to date appraisal. Keep in mind that these mortgages are sometimes registered for an amount greater than the purchase price of the property.
    The line of credit product is sold on the basis that once the credit limit is established and the security is in place, the balance can fluctuate within the control of the borrower.
    Unfortunately the borrower is not fully aware of the advantages/disadvantages for each product. Many times they only know they have a mortgage!!!

  • Keith on 2014-07-12 1:28:44 PM

    If I am reading this correctly, the Broker initially sourced the deal to a lender, a collateral charge was registered for a higher amount and the Broker was paid for what the client used. The client wanted to increase the advance and yes the lender has every right to request re-qualification, but the Broker doesn't get paid on other than the new funds and the client pays a small fee to have the increase processed... all good so far however the broker moves the client to a new lender, gets paid on the full amount and the client is charged the new fees, appraisals and other sundry cost. Seems to me the Broker in this case didn't do the best thing for client, just served their own best interest..... but to post it here as a complaint about a lender, come on

  • Omer Quenneville on 2014-07-15 8:02:31 AM

    What happens if the bank refuses the loan based on a new in-house policy that the real estate is now classified at that bank as in a risk area but is fine at other banks. Because of the collateral charge the client is forced into paying out the mortgage and moving to another bank to get access to the equity simply because the equity is being leaned upon even though the bank declined the increase.

  • Omer Quenneville on 2014-07-15 8:02:53 AM

    What happens if the bank refuses the loan based on a new in-house policy that the real estate is now classified at that bank as in a risk area but is fine at other banks. Because of the collateral charge the client is forced into paying out the mortgage and moving to another bank to get access to the equity simply because the equity is being leaned upon even though the bank declined the increase.

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