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Collateral Charges – Another Lender Gets On Board

Thursday, November 4th, 2010

Transcript of Video:

Hi, everybody. Rowan Smith with the Mortgage Centre.

I want to talk today about a change that was announced that’s been swept under the radar, and that’s that TD Bank has announced their mortgages will now be a collateral charge. Now what a collateral charge is, it differs than a traditional mortgage in that you can re-advance that mortgage back up to the amount or even beyond that you originally registered it for.

Now to a client, what does this mean? Let’s look at it from numbers. Let’s say you bought something for $500,000, you put 20 percent down under grant, and you had a mortgage for $400,000. Traditionally, as you paid down that mortgage, you could only advance it ever back up to the amount of the original mortgage, not beyond, and many institutions didn’t allow you to re-advance it at all.

However, a collateral charge allows you to register the mortgage for some fictional figure, perhaps the value of the home plus 25 percent — not the mortgage, but the value of the home plus 25 percent or more. Some institutions, such as Scotia, don’t even specify a limit.

Now, why they’re doing this is twofold. First off, for you the client, yes, it means convenience. What you’re going to be able to do is go back into the bank after a couple of years. You’ve paid your $400,000 mortgage down to $350,000, but let’s say you need $50,000 because you want to renovate. Well, rather than having to break the term and pay legal fees and all this type of stuff, you’ll be able to now just borrow back up to the $400,000, or beyond. If your home is worth more now, based on how much they registered the mortgage for.

It sounds very convenient, but the reality is it’s also a form of golden handcuffs, because once you’re into that type of charge, you can only get out of it by paying off the mortgage and moving it to another institution and paying the legal fees to do so. It’s a way of locking you up with that institution.

Now to anybody that’s had a mortgage for longer than one term, they’ll know that first offer that the bank gives you at renewal is never that great. So if you’re thinking you’re going to move your mortgage or you’re going to shop your mortgage at the end of your five-year term, if you’ve taken the new collateral charges from TD or from other institutions like that, chances are you’re not going to be able to shop it without eating some legal fees in there.

So primarily, it’s a customer retention tool as well as it does, in fact, add value through ease of use and ease of future access to your funds. Myself, I’m not a fan of them, however.

For the Mortgage Centre, I’m Rowan Smith.