20 Feb

Three strikes and you’re out, collateral mortgages!


Posted by: Adam Hawryluk

This issue deserves attention, so I’m glad CBC Marketplace did a report on it (watch HERE).

I don’t feel they went into enough detail about the actual concerns in the change, but they were more interested in how evasive the bank representatives were.

Here are three strikes against collateral mortgages:

1) You can only refinance up to 80% LTV now
Making a mortgage non-transferable doesn’t seem on the surface to be an issue when TD’s Farhaneh Hague says that “1% of customers use the benefit of transferring out”, stating most people refinance. The issue is that new regulations place a maximum on refinances at 80%, so any client in a collateral mortgage that doesn’t have 20% equity in their house, is effectively handcuffed to their initial lender.
So when you’ve bought a house with 5% down as most first time home buyers do, and your 5 year fixed rate TD mortgage matures, you probably have about 12% equity in your home. That means you can’t refinance and you’re stuck with whatever TD feels like offering you for an interest rate at maturity.
2) Collateral mortgages can be registered at 125% of the value of the home
Lenders have the ability to tie the extra value to unsecured debt the client holds with the lender (ie. credit card, unsecured line of credit). So if you default on your $3,000 credit card, they could theoretically seize your home. 
3) Collateral mortgages don’t allow for 2nd mortgages
It’s not a position anyone wants to be in, but if clients need to take more equity out of their home temporarily, other lenders won’t place a 2nd mortgage behind a collateral 1st, due to them possibly being registered at 125% of the home value.
There are benefits for some clients to take a collateral mortgage, but I think it needs to be clear that there are some significant downsides for much of the population.
What are your thoughts?
Adam Hawryluk
DLC Canadian Mortgage Experts