Buying a home is a busy time. Besides going to work and your daily errands, you’ll need to find time to go house hunting. Once you’ve found your dream home, it can be easier to pop open the cork on the champagne bottle and worry about your mortgage later. While it’s important to celebrate, you shouldn’t lose sight that if you’re like most people, your mortgage will be the largest debt of your lifetime.
There used to be a time when you could walk down to your local bank branch, get a mortgage and be done with it. While you can still stop by your local branch, it shouldn’t be your only stop. Websites like Rates.ca make it easy to compare mortgage rates. However, when shopping for mortgages, it’s important to make sure you’re comparing apples to apples. Some of Canada’s biggest banks are offering collateral mortgages, right under the noses of unsuspecting homeowners.
What is a Collateral Mortgage?
When you’re not familiar with the mortgage lingo, it’s easy to get collateral and conventional mortgages mixed up. Although both mortgages start with the same letter in the alphabet, there are key differences to be aware of. Collateral mortgages aren’t just a product offered by secondary lenders – the big mortgage lenders like TD Bank and Tangerine Bank are offering them.
Most homebuyers choose a conventional mortgage. With a conventional mortgage, your mortgage amount is for the amount you need to borrow. For example, if you’re buying a $400,000 home with a 20% down payment ($80,000), you’ll need a mortgage of $320,000.
When you choose a collateral mortgage, things aren’t as simple. With a collateral mortgage, your lender registers a charge up to 1.25 times the value of your home. In the example above, your lender would register a charge of $500,000.
Why Choose a Collateral Mortgage?
With real estate values skyrocketing, many homeowners are treating their homes as their personal ATM. With a collateral mortgage, your lender assumes you’re going to tap into the equity in your home later on. Collateral mortgages offer a convenient way to borrow from the equity from your home for home renovations or to buy a rental property.
However, collateral mortgages have their downsides. If you thought switching lenders is hard with a conventional mortgage, you haven’t seen anything yet. Not only will you have to pay a hefty mortgage penalty to switch, but you’ll also have to pay your new lender a fee to set up your mortgage.
Shopping the mortgage market is difficult with a collateral mortgage. Since it’s difficult to switch lenders when your mortgage comes up for renewal, your lender has less incentive to offer you a low mortgage rate.