“The (potential) win for the client is that there are no new legal fees for securing a line of credit or increasing the mortgage balance in the future (assuming, generally speaking, that they choose either the 125 per cent of the value option or a max amount other than the actual mortgage amount),” Dustan Woodhouse
, a B.C,-based broker with Dominion Lending Centres
wrote for CMP magazine
. “If the client chooses to register their mortgage with a collateral charge lender for only the mortgage amount then the upside for them is quite limited moving forward.”
Collateral mortgages allow the lender to secure more than the value of the home when a borrower takes out a mortgage and – the biggest problem according to a number of brokers – is that clients are often never told.
“(Collateral mortgages) should be explained to clients and they should sign an acknowledgement (and) not just one of many acknowledgements they sign but one that is clearly understood and is explained to them,” Omer Quenneville of Centum Regal Financial Corp. told MortgageBrokerNews.ca earlier this year. “I personally think collateral mortgages are a trap because you can’t transfer a mortgage out of a bank once you have a collateral mortgage; it has to be discharged and you have to pay the discharge penalties in order to be able to do that and then re-register with a new bank.”
Still, collateral charge mortgage are here to stay, says Woodhouse, who advises brokers to educate themselves – and their clients – about the potential pitfalls and advantages.
And part of that education includes advising clients to spread their products among several different lenders.
“Considering that nearly all institutions (most likely including the client’s current bank) now register in this fashion, it is perhaps worth advising the client not to have all their banking, credit cards, and small loans with the same institution with which they place their mortgage,” Woodhouse wrote. “Instead they should spread their money and investments among two or more institutions. In fact, placing their mortgage with a third altogether is more prudent still.”
One broker reiterates the positives of the much-maligned – and increasingly popular -- collateral mortgage product.