Collateral vs. Conventional Mortgages
Your Trusted
Mortgage Advisors
Julie Stewart-Boyle
Cell: 250-668-4420
[email protected]
jsbmortgages.com
Vancouver Island
250.756.7744
Lower Mainland
604.985.8978
Example: $200,000 mortgage, 5 year term, 25 year amortization:
A conventional mortgage is registered against the property for $200,000. If all the
payments are made on time, the mortgage is renewed on the same terms every five years
(you can go elsewhere if you want on renewal) and no prepayments are made, the balance
is zero after 25 years. These mortgages can be switched or transferred involving basically
little or no cost to the consumer, BEFORE they mature. So if you need to move before the
end of your mortgage’s term due to job, illness or upsizing/downsizing, for example, you
can do so, but with a penalty. If you want to transfer your mortgage, no legal fees are
involved, as it is a straight transfer (everything stays the same) from one lender to another.
A collateral mortgage has as its primary security, a loan agreement, and as “backup,” a
collateral security, being a mortgage, against your property. The difference is that, in most
cases, the mortgage will be for 125% of the value of the property. In the example, the
mortgage registered will be for $250,000. But you will only receive $200,000. The loan
agreement will indicate the actual amount of the loan, interest rate and monthly
payments. Most financial institutions cannot accept a collateral mortgage to transfer in,
therefore, collateral mortgages, for the most part, cannot be switched/transferred to a
different lender.
The collateral mortgage documents may indicate an interest rate of prime plus 5-10%. This
will permit you to go back to this same bank and borrow more money from time to time,
without having to register new security (a new mortgage). The lender will offer you a
closing service (like FNF), to register the mortgage against your property, so no legal fees.
Tempting, however, this collateral loan agreement has different consequences, which are
usually not explained to the borrower.
 Most banks will not accept “transfers” of collateral mortgages from other banks,
so the consumer is forced to pay discharge fees to get out of one mortgage and additional
fees to register a new mortgage if they move to a new lender. Thus the bank is able to tie
you to them for all your lending needs indefinitely because it will cost you too much to
move.
 Lenders may be able to use the collateral mortgage to offset any other unpaid
debts you have. Offset is a right under Canadian law that says a lender may be able to seize
equity you have in your home, over and above the mortgage balance, to pay, for example,
a credit-card balance, a car loan, or any loan you may have co-signed that is in default with
the same lender. In essence any loans you may have with that lender may be secured by
the collateral mortgage. Nobody goes into a mortgage thinking about default, but “stuff”
happens in people’s lives and 25 years is a long time.
Tudor Mortgage Corporation
1 - 5148 Metral Drive, Nanaimo, BC V9T 2K8
T - 250.756.7744 l F - 250.756.9745 l TF - 866.406-9322
Julie’s Direct Cell – 250.668.4420
E - [email protected]
www.jsbmortgages.com
Collateral vs. Conventional Mortgages
Your Trusted
Mortgage Advisors
Julie Stewart-Boyle
Cell: 250-668-4420
[email protected]
 Let’s say your house value is $200,000. A collateral first mortgage registered on
the property is $250,000. The amount owing on the mortgage is $140,000. If you were to
need an additional $20,000, but the lender declines to lend it for any reason, then
practically speaking you won’t be able to approach any other lender. They will not go
behind a $250,000 mortgage. Your only way out would be to pay any prepayment penalty
to get out of the first mortgage and pay any additional costs to get a new mortgage.
jsbmortgages.com
 Perhaps your mortgage is in good standing but you default under a credit line
with the same bank. The bank could, in most cases, start default proceedings under your
mortgage, meaning you could lose the house.
Vancouver Island
250.756.7744
Lower Mainland
604.985.8978
Some lenders are offering collateral mortgages in a “negative option billing” manner.
Unless you are informed enough to say you want a conventional mortgage, you will be
asked to sign documents for a collateral mortgage.
(source: www.moneyville.ca, www.canadianmortgagetrends.com,
http://www.cbc.ca/marketplace/episodes/2013/01/busting-the-banks.html)
Tudor Mortgage Corporation
1 - 5148 Metral Drive, Nanaimo, BC V9T 2K8
T - 250.756.7744 l F - 250.756.9745 l TF - 866.406-9322
Julie’s Direct Cell – 250.668.4420
E - [email protected]
www.jsbmortgages.com