When you approach your lender for a new mortgage, I’m sure one of the most important questions to ask will be “what’s your best rate?” You may have already gone on the internet or talked with a mortgage broker and determined the very best rate for the term you are considering and now are hoping your own bank will match the offer.
One of the least things discussed by lenders is how your mortgage is actually registered.
Why is this important? Some lenders register all their mortgages as a collateral charge, while others allow you to choose the type of mortgage which determines whether or not your mortgage is registered collaterally or conventionally. For example, if you are applying for a mortgage at 95% financing, your mortgage cannot be re-advanceable as you must have at least 20% equity in your home to qualify for a mortgage that is. So why would a lender insist on registering all their mortgages collaterally? Perhaps one reason is that when your term is up, your collateral mortgage cannot be transferred, or “switched”, to another lender offering a better rate without incurring legal fees, etc. A normal conventional mortgage allows for a transfer to another lender at no cost.
Some of our lenders that offer a collateral charged mortgage do so with the provision of allowing for a combination of separate components to a Global Limit (ie fixed, variable, and/or line of credit combinations) and that your mortgage is re-advanceable (in other words, you can re-borrow back to the Global Limit without incurring any legal fees and having to re-qualify again). This is a great product but one must keep in mind that the mortgage is collaterally charged. In my humble opinion only, the advantages of this product far outweigh the disadvantage of not being able to transfer to another lender without incurring legal fees.
My only concern is that as a client of a bank (or a credit union) you should be given the clear choice on how you would like your mortgage registered. If you have no desire to have your mortgage re-advanceable and only wish to pay off your mortgage as quickly as possible, then having your mortgage registered as a collateral charge is indeed not in your best interest. Make sure to ask (“is this a collateral or a conventional mortgage?”) the next time you apply for a new mortgage!