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Collateral-Charge Mortgages: Risks and Rewards
Explores the advantages and disadvantages of collateral-charge mortgages in Canada, highlighting the restrictions on switching lenders and accessing other financing.
English
Canada
Labour MarketFinanceReal EstateBankingMortgageLending
TdTangerine
Penelope Graham
- Are collateral-charge mortgages inherently bad products?
- While not inherently bad, collateral-charge mortgages present risks and restrictions that borrowers must understand. The streamlined equity access comes at the cost of reduced flexibility in switching lenders or accessing other financing.
- What is a collateral-charge mortgage, and how does it work?
- A collateral-charge mortgage, also known as a readvanceable mortgage, bundles a mortgage and a line of credit based on home equity. It allows access to home equity without a separate application, but restricts switching lenders as the mortgage must be fully discharged first.
- Which major Canadian banks only offer collateral-charge mortgages?
- Many big banks in Canada, like TD and Tangerine, only offer collateral-charge mortgages. This means many Canadians unknowingly have this type of mortgage, limiting their options in today's competitive mortgage market. Borrowers need to be aware of these limitations.
- How can a collateral-charge mortgage affect access to other types of financing?
- Collateral-charge mortgages can hinder access to other financing like second mortgages or HELOCs because a significant portion of the home's value is already tied up. This lack of financial flexibility can be a major drawback.
- What is the main disadvantage of a collateral-charge mortgage when trying to switch lenders?
- The main downside is the difficulty in transferring the mortgage to a new lender; it requires full discharge, incurring fees (around $2000) unless a new lender covers them. This adds complexity and cost when seeking better rates.