Both Sides Of A Collateral Mortgage
“A Collateral Mortgage Charge
Pros And Cons”
Collateral mortgages are getting more air play as some of the main line mortgage lenders are slowly or quickly moving to them.
Unlike a standard mortgage that results in a charge being placed on the property title, a collateral mortgage is actually a promissory note with a lien registered against the property.
In the past, collateral mortgages in the mortgage financing world were mostly used with secured lines of credit, but now there is a greater interest in using them with conventional mortgage lending.
The reason for this is two fold. First, because normal regulatory limitations on loan to value do not apply, a mortgage lender can register a lien for an amount greater than the property value, at a rate higher than current market rates. This allows the lender to be able to provide additional advances as well as increases to rate during the life of the mortgage without having to pay out the existing mortgage or re-register mortgage security.
So on the one hand, the collateral mortgage provides borrowers with potentially easier access to future borrowings at lower mortgage placement costs. On the other hand, the collateral mortgage also serves as a barrier to the lender to get a second mortgage from a different lender as the collateral charge will not provide any security value to another lender, regardless of the amount of money owing on the original mortgage.
As a mortgage tool, the collateral mortgage and be a great fit for a borrower, provided they understand how it works and the benefits it does offer are things that the borrower thinks they may be able to take advantage of in the future.
That being said, a lack of full understanding of how the collateral mortgage will function can cause problems down the road, especially if the borrower is not able to qualify with their existing lender for incremental borrowing at a time when funds are required.
But even if incremental funds cannot be secured, the borrower can still take advantage of the prepayment options provided in their collateral mortgage, refinance with another mortgage lender and discharge the collateral mortgage in the process. This will incur incremental legal costs and in most cases a collateral mortgage cannot be relocated to another lender so a new mortgage will need to be underwritten and charged on title.
The best course of action to find out more about a collateral mortgage or a specific mortgage program that may or may not have a collateral mortgage charge associated with it is to work with an experienced mortgage broker who can serve as an independent adviser to you for no cost in most cases.
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About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel