There are two ways a lender registers a mortgage loan when your home is used as the security: as a mortgage charge, or as a collateral mortgage charge. Mortgage charges, which are registered at the Land Title or Land Registry Office (depending on the province), can be registered, transferred or discharged.
Collateral mortgage charges are registered under the Personal Property Security Act (PPSA) and can only be registered or discharged (not transferred). If you have a collateral mortgage and want to change lenders, you need to re-register a new mortgage and this will cost about $800 + tax. So in future, switching your fixed-rate mortgage to a different lender at renewal will cost you a little under $1000.
A little background- The TD Bank took some heat regarding collateral mortgages after the CBC ran a report on Marketplace in 2013. One of the bones CBC picked with TD was that its collateral registration is not disclosed to clients until the customer is signing in the lawyer’s office, at which point it’s too late to switch lenders.
With a conventional mortgage, you and your lender agree on how much you can borrow, the length of the term and the interest rate. As an example, say the house you’re buying is worth $200,000. With 20 per cent down you would borrow $160,000. You might select a fixed-rate, five-year term. At maturity, if you want to transfer, your mortgage to another lender at renewal, you can do so for minimal cost (approx. $30), which the new lender will usually cover.
With a collateral mortgage, you still have an agreed interest rate and term, but the bank registers a charge of up to 125 per cent the value of your home, provided you have at least 20 per cent equity in it. In this example the charge would be $200,000 plus up to another $50,000. The pitch is that doing this makes it cheaper to borrow more money from TD in the future (because the charge does not have to be re-registered). This way, even if your house goes up in value, you can tap into that extra equity without having to consult anyone other than your TD Bank rep (assuming you qualify)…..How convenient. Unfortunately though, this convenience has a downside. By giving TD the legal right to the first 125% of your home’s current value, your collateral is worthless to any other lender.
This begs the question: once the bank has its customers locked-up, what incentive does it have to offer aggressive pricing? Put another way, if the threat of switching lenders is your best way to negotiate a fair deal at renewal, what happens to your leverage when the bank neutralizes that threat by making it far more expensive to leave than to stay? The advantage to the bank is that a collateral agreement makes it harder for you to leave because it interlocks your lending. A collateral mortgage secures all debt held with that lender under one agreement. So a line of credit, a credit card, car loan or any personal loan will all be secured by the same agreement.
Another big difference is that in a conventional agreement your rate cannot be increased during the term, even if you default or fall into arrears with your payments. With a collateral mortgage, if you go into arrears or default, the bank has the right to raise your interest rate by up to 10 percentage points.
To be fair, collateral mortgages can save you legal costs if you:
a) have a high likelihood of refinancing before maturity, and
b) the lender approves you for those additional funds (a big caveat).
But they also have potential drawbacks, over and above the additional switching cost:
- Since they’re often registered for more than the mortgage amount, collateral charges can sometimes prevent you from obtaining a second mortgage or a secured line of credit elsewhere (unless you pay any penalties and fees required to leave the collateral mortgage lender, or unless that first lender reduces the mortgage amount it has registered and permits secondary financing).
- Title insurance premiums can sometimes be higher for a collateral mortgage than for a regular mortgage.
- In some cases, defaulting on another debt owed to a collateral mortgage lender can put your house at risk. That’s because that lender can theoretically seize your home equity if you don’t pay that other debt. (This is called “offsetting” in legal parlance.)