Knowledge is power when it comes to mortgage lending; the more you know, the more opportunity you have save money in the long run. This being said, one of the most controversial mortgage terms is a “collateral charge”. When locking in a mortgage with a lender, they can use one of two methods to secure the mortgage or loan against your property; the first is called a standard charge mortgage & second is a collateral charge mortgage.
A standard charge is the typical way to assign a mortgage to a property. A lawyer is needed to complete the initial close but when the mortgage matures the home owner has the opportunity to transfer or switch the mortgage to another lender (without a lawyer re-assigning the mortgage). In most cases, this transaction if offered as a free service by the new lender. This creates competition because all of the potential lenders, including the existing lender, are on an equal playing ground.
A collateral charge mortgage is different, a lawyer is needed to assign the initial mortgage but when the mortgage matures a lawyer would also be needed to re-assign the mortgage, if it was to be moved to another lender (refinance). This could add close to $1,000 in legal fees to the transaction. The current lender would know that the home owner would need to absorb this cost so they wouldn’t necessarily have offer a competitive rate to renew the mortgage.
Lenders that exclusively assign collateral mortgages claim there are advantages. The lender usually touts that a collateral mortgage allows the home owner the opportunity to increase the loan amount or refinance at any point during the term, without the use of a lawyer.
The important information to take from this is article is that competition and choice are key to locking in the best rate when your current mortgage matures. Know what you are signing, discuss your options with a broker before handcuffing yourself to a bank who only offers collateral mortgages.
Darren Robinson is a Barrie mortgage broker, dedicated to offering the best mortgage strategies and provides personal assistance to help people qualify for difficult mortgages and loans. Call 705.737.6161