Collateral Mortgages: What is a collateral mortgage?
Unlike a standard mortgage that places a charge on title, a collateral mortgage, which has been around for years but typically only used for secured lines of credit, is a promissory note with a lien on the property for the total amount registered. You can register more debt against the property than the property is worth since normal regulatory limitations on loan to values do not apply.
For example, TD Bank changed their mortgage lending practices on October 18, 2010, changing their mortgages to collateral mortgages. They began registering 125% of the property value, even though that amount may not have been advanced to the borrower initially.
Since the collateral mortgage allows for the “re-advancing” of principal, like a revolving line of credit, the balance can rise. Most chartered banks will not allow transfers of collateral mortgages from other chartered banks. This results in additional legal fees over and above what are normally charged for a straight transfer on renewal because the mortgage must be fully discharged as opposed to simply being transferred.
In addition, collateral mortgages allow lenders to lend more money to borrowers, based on their qualifications, after closing without registering a new mortgage because the current mortgage is registered at a higher amount than is advanced. The rate can also be increased because the rate on the collateral mortgage is also registered at a higher amount than is charged.
Mortgage brokering in Ontario is regulated by the Financial Services Commission of Ontario (FSCO) and requires a license. To obtain a license you must first pass an accredited course. The Real Estate and Mortgage Institute of Canada Inc. (REMIC) is accredited by FSCO to provide the course. For more information please visit us at www.remic.ca/getlicensed or call us at 877-447-3642.
For example, a bank can register a mortgage at 125% of the value of the home and at prime plus 10%, but may only advance 80% of the value of the home and charge prime at the time of closing. This allows for both additional advances of principal and increases in the rate during the life of the mortgage.
Since the mortgage is registered for such a high loan to value, the homeowner won’t be able to take out a second mortgage, regardless of how low the outstanding balance is on the first mortgage. While this type of situation allows for the homeowner to borrow more funds after closing without having to discharge a current mortgage and register a new one, it also comes with the above mentioned risk, making it important to explain this to the borrower when arranging this type of product.