There are 2 types of mortgage registration in Canada: standard charge and collateral charge. Homeowners usually don't inquire about the type of mortgage registration due to lack of knowledge or lack of disclosure by the lender/broker arranging the mortgage. Mortgage registration is an important fine print detail. There are pros and cons associated with collateral mortgages:
Collateral Mortgage Pros
- It allows the homeowner to access equity as they pay down the mortgage
- Legal fees are not required (saving of approximately $1,000) to access further equity
- Good product if homeowner intends to refinance/access equity prior to mortgage maturity
Collateral Mortgage Cons
- Due to registration, homeowner will incur legal fees (approximately $1,000) to move the mortgage to another lender at renewal
- Homeowner loses negotiation advantage if they need to access additional equity since they can't leave the current lender without paying a penalty (3 month interest or IRD) plus legal fees
- Homeowner might not qualify with existing lender leaving no options to access needed funds
- Some lenders register the collateral at 125% or 100% of home value, effectively blocking the total amount and restricting the homeowner from accessing equity
Collateral mortgage registration is designed to retain clients at renewal. With slowing real estate market, less sales therefore less new mortgage originations, lenders want retain more clients. Homeowners will be faced with a decision to renew at a less competitive rate or pay legal fees to move their mortgage to another lender at renewal. CBC marketplace did a show on collateral mortgages where they focused on one banking institution. Be aware that other lenders employ similar strategy as well.
Understanding the costs of getting into a mortgage and out of the mortgage at renewal, is important in deciding which mortgage product makes financial sense. There is more to mortgages than just rates.