Collateral Mortgage Charges – The Facts

General Peter Paley 30 Dec

Collateral Mortgage Charges – The Facts

As the financing world changes with tighter policies, new regulations and tougher qualifications, I feel it is very important to revisit some information surrounding Collateral Mortgage Charges.
A collateral mortgage charge according to The Financial Consumer Agency of Canada website is;
Collateral charge

A collateral charge can be used to secure multiple loans with your lender, including a mortgage and a line of credit.

The charge can be registered for an amount that is higher than your actual mortgage loan. This allows you to potentially borrow additional funds on top of your original mortgage loan in the future without having to pay fees to discharge your mortgage and register a new one. You only have to make payments, including interest, on the money you actually borrow.
A new charge will only be required if you want to borrow more than the amount that is registered on the original charge. You’ll still need to apply for additional money and re-qualify.
Changing lenders when you have a collateral charge

A collateral charge may make it more difficult to switch lenders at the end of your term. Some lenders may not accept the transfer of your collateral charge mortgage.
To change lenders you’ll need to discharge your mortgage. You’ll need to repay, or transfer to the new lender, all loans you’ve secured with a collateral charge. This may include car loans or lines of credit. You may also have to pay fees such as legal, administrative, discharge and registration costs. Check with your lender for details and if any discounts are available to you.

https://www.canada.ca/en/financial-consumer-agency/services/mortgages/choose-mortgage.html

This type of registration is becoming more and more popular with The BIG banks and Credit Unions alike. There are a few reasons why financial institutions are switching to this. I’ve made a pro/con list for you to help you decide whether this may or not be good for you.

PROS:

1). Mortgage is registered at a higher amount to allow for future borrowing. This means if you had to remortgage in the future either for a refinance or a Home Equity Line Of Credit that you wouldn’t have to re-register the mortgage and pay legal fees.

CONS:

1). All you debt with your lender can now be attached to your mortgage. A lender will usually use the term ‘all indebtedness’. This means that your car loan, credit card and even your overdraft protection can be linked to your mortgage. This means that you have a risk of foreclosure for any other piece of debt held at that Financial Institution. Yes, you can be foreclosed on for missing your credit card payment.

2). The mortgage will be more costly to transfer at renewal if necessary. Typically a collateral mortgage charge will need to be discharged and reregistered should you decide to change lenders.

3).The renewal rates typically offered on collateral mortgages seem to be higher than they should be.

I often get questions from my clients asking if the Collateral Mortgage Charge is bad? The short answer is no. It is not bad. However, if your lender is registering the mortgage this way it is important that you understand how the mortgage charge works and understand that it will limit you in the future.

I usually recommend that if a mortgage has a collateral charge that the client ensure that they limit the amount of credit that they have at that lender. For example, Mr. and Mrs. Mortgage have their Mortgage, personal line of credit, car loan and two credit cards at BANK ABC. I make the recommendation, that they either move their mortgage to another lender or see if they can move some of their personal credit to another lender. There have been cases, where people have been put into foreclosure for some bad credit card debts. Unreasonable? Maybe. This scenario can even get more complex if the borrowers are self-employed and have their small business bank accounts with that collateral charge lender.

That’s why it is important that you always come to your friendly neighbourhood mortgage professional for any advice surrounding your mortgage. We will always put our client’s best interests FIRST and can usually save you $1000s of dollars in unnecessary interest and fees.

Peter Paley

The Dangers Of CMHC Getting Out Of The Refinance Business

General Peter Paley 10 Dec

The Dangers Of CMHC Getting Out Of The Refinance Business.

CMHC and the other mortgage default insurers have exited the refinance business under the premise it is going to protect the Canadian Tax Payer. Some thought this was a prudent measure, others thought it was bad policy. We have been monitoring the effects as clients and potential clients have been coming into our office and applying for mortgage refinances.

The new refinance rules are going to take effect on January 1st, 2018 which will subject anyone wanting to refinance their mortgage to qualify at a new stress test of either the Bank of Canada Qualifying rate or the contract rate + 2% (whichever is higher. I don’t want to debate the policy in this blog post. I do want to point out what I hope is an unintended consequence.
Single or one income households are going to be drastically affected. Not only are costs rising gas, hydro, water, property taxes etc, wages seem stagnant and reliance on credit cards and lines of credit are on the rise.

While this is bad enough and will probably force 100s, maybe 1000s of Canadian families to sell their home, the real victims are going to be people living in smaller homes under 900 square feet and people living in what we in the mortgage industry refer to a “RED ZONE”. A “RED ZONE” is typically a working-class neighbourhood that is plagued by high crime rates and various socioeconomic challenges.

Many lenders have put a moratorium on small houses in general and any homes located within their self-determined red zone. Winnipeg, in particular, has a large number of tiny houses 500 – 800 sqft located right across the city. From West Kildonan to St. Vital and from Transcona to Westwood, there are many homes that simply will not be financed by MANY, MANY major lenders. Winnipeg’s red zone as a general rule of thumb starts at Portage and Main, goes west along Portage Avenue, then turns north on Arlington Street and continues all the way out to Church Avenue, then goes all the east to Main and finally goes all the way back south and ends at Portage and Main. My point is there are going a lot of houses not eligible for refinancing. We are finding even the credit union system is starting to shy away from these properties.

Before the last set of rule changes, CMHC and the other insurers would offer bulk insurance to lenders and these properties would ultimately be insured against default. It was a win-win for the lender and the client. Now, that the insurers are prohibited from offering insurance for refinances, lenders are losing their appetites for these small/higher risk properties.

I just want to be very clear that a homebuyer CAN purchase and CAN mortgage one of these properties because default insurance IS available for these types of properties in a purchase situation. The challenge is now and will be what will be the policy for the people that are living in smaller homes and that have located in these red zones?

In my opinion, these homeowners are going to have to sell their homes and hope they are able to qualify for a new one with 5% – 15% down or refinance at a much higher rate with a lender who still has the appetite for such risk.

What will happen to the condition of these homes if the homeowner isn’t able to refinance to do maintenance and upgrades such as new roofs, foundation repairs, build a garage, replace the furnace or even the windows? What will happen to one-income-households that have a financial emergency or end up on a short or long-term disability?

We are already seeing files that are being declined due to this property bias and quite frankly, I find it very alarming.

I would like to ask that anyone who reads this reach out to their MP and even their MLA to draw their attention to this small home and red zone paradox. In my opinion, it is imperative that the mortgage default insurers immediately roll out a policy/product that is specifically designed for these “riskier” properties.

If you or anyone you know is looking to refinance their mortgage, please have them contact my office directly.

Peter Paley
Senior Mortgage Partner
DLC – Spooner Financial
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