Is it possible to register a mortgage on your property for more than it's worth? That's just what one mortgage product allows you to do and it's growing in favour by Canada's big banks. But opinion is divided as to whether this is a good idea for consumers or another bonanza for the banks.
Two banks, TD Canada Trust and ING Direct, have now made collateral mortgages mandatory on all new loans with other major banks offering them under a negative billing option, which means unless you specifically state you want a so-called conventional mortgage, you're asked to sign a collateral mortgage.
What is it?
"The primary security of a collateral mortgage is a promissory note with back-up or collateral security in the form of a mortgage registered against your property," says David O'Gorman, president of MortgageLand Inc. in Markham, Ont.
How does it work?
The bank will register a mortgage for an amount that can represent 100 per cent, or more, of your property value. For example, TD Canada Trust's limit for collateral mortgage registration is 125 per cent of property value.
The actual amount of the mortgage loan will be less than the registered amount, but the additional money can be available in future without reapplying and paying additional fees, provided that income and property value are sufficient.
Property value: $200,000
Mortgage principal: $150,000
Collateral charge amount registered: $225,000
Initially the borrower receives $150,000 and makes payments based on this amount. However, the bank has registered $225,000 against the property as a collateral mortgage.
At a later date and provided the customer qualifies (based on adequate income and rise in property value) an additional $75,000 can be available for the customer's use without refinancing with a lawyer.
The catch is that most chartered banks will not accept transfers of collateral mortgages from other chartered banks.
The move to collateral mortgages is controversial with some industry experts raising concerns while others see it as offering flexibility to consumers who can utilize additional funds.
"For some people who are purchasing their last, not starter, home who have reached their career pinnacle with a good income, it allows them to access funds to purchase a cottage or other equity-building investment," says Rob Regan-Pollock, a mortgage broker and consultant with INVIS in Vancouver.
In other words, used responsibly a collateral mortgage can benefit consumers.