What is the Difference Between a Collateral Mortgage and a Conventional Mortgage?
All You Need to Know is Type of Mortgage Loan in Canada.
When you rent money to purchase or refinance your home, you approve of using your home as collateral for the mortgage loan. A mortgage acts as an authorised contract between you and the mortgagee. It consists the details of your loan and measured on a property, such as a house or a condo.
There are two approaches to file a mortgage on the title: a conventional mortgage and a collateral mortgage.
Preferring the best mortgage that suits your current and future essentials will eventually save your cost and time. To make this possible, today we are going to discuss the key difference between the collateral mortgage and conventional/traditional mortgage.
What is the Collateral Mortgage?
A collateralised mortgage is a type of upfront mortgage, which means you can borrow more money when you pay off your mortgage or if the value of your home increases. In this situation, your lender will register your property with a collateral fee, often for an amount higher than the loan amount required. This amount can be up to 125% of the cost of the house.
Now the private mortgage lenders have begun to adapt; some private lenders are now open to offering second mortgage loans on the back of collateralized mortgages.
Registering a Collateralized Mortgage Fee in Canada
When you admit to registering a collateral mortgage charge in Canada, you are able to rent money from your home at any time more than the cost of your home. And the collateral fee makes it easy to access home equity for renovations, investments or debt consolidation.
Likewise, with a Home Equity Loan, your home will be registered with collateral for more than the actual mortgage amount. And unlike a traditional charge mortgage, a collateral charge mortgage is not easily transferable and switching to a new lender is difficult.
However, it holds some shortcomings because there may be fees attached to it, or fewer lenders are willing to cover the cost of the switch. Also, with a collateral fee, it can be difficult to obtain a second mortgage or home equity line of credit (HELOC) unless the value of your home increases significantly. When you have a high outstanding mortgage balance, it translates into less available equity for you to access.
Before you sign a mortgage commitment, it is important to weigh the pros and cons of a collateral-free mortgage.
Pros of a Collateral Mortgage:
The main advantage of a collateral-fee mortgage is that it's much easier to borrow additional money from your lender in the future, as you don't have to go through the process of refinancing and paying the associated legal costs.
Another advantageous point is that if you qualify for a HELOC or increase in the mortgage amount, you'll save on fees that would normally be associated with the process, such as paying for a real estate attorney. to do, and so on.
Cons of a Collateral Mortgage:
However, in some cases, the drawbacks of a collateralized mortgage may outweigh the potential benefits.
The disadvantages of holding a collateral fee mortgage include the fact that:
- If you wish to refinance your mortgage to consolidate loans and/or renovate your home etc., and this lender refuses to do so, you will not be able to approach any other lender.
- In most cases, if you want to change lenders to look for a better product or rate in the future, you'll have to start over and pay new legal fees, which usually range between $500 and $1,000.
- If you have equity in your home and have defaulted on another loan or credit card, the lender can extend your collateralized mortgage and pay off this other loan.
- Registering large amounts can make it difficult to secure secondary financing for other things.
What is a Conventional Mortgage?
A conventional mortgage is a mortgage loan where you may be eligible for a conventional mortgage if you can come up with at least a 20% down payment. A mortgage in which more than 80% of the property's fair market value, also known as the borrowing value, is referred to as a high-ratio mortgage.
If in either case, you can't afford to pay at least 20% of the appraised value of your home, you'll need to qualify for a higher-ratio mortgage that mandates that you pay for first mortgage default insurance, provided either by Canadian Mortgage and Housing Corporation (CMHC) Insurance, Sagen (Genworth Financial), or Canada Guarantee.
For example, if you're buying a home for $250,000, your down payment must be at least $50,000 to qualify as a traditional mortgage. If you want to borrow more than $150,000 for a $200,000 home, you'll need to get a high-ratio mortgage. Higher ratio mortgages can be achieved with a 5% down payment.
Pros for a Conventional Mortgage:
- The most essential advantage for borrowers with a traditional mortgage is that they have more equity in the home due to the larger down payment.
- The other major benefit of qualifying for a traditional mortgage with a loan value of more than 80% is that you'll benefit from saving on the additional costs of mortgage default insurance premiums.
- On the table of benefits, the notable benefit of making a hefty down payment is that the bank or lender will regard you as a low-risk borrower and, in many cases, extend you the preferred low interest rates.
Cons for a Conventional Mortgage:
The main drawback of switching to a traditional mortgage is that you have to put more money into the down payment and be left with small savings. This can be troublesome for homeowners if they need to get distressed funds for unexpected loans.
An additional disadvantage that can occur with a traditional mortgage is if the homeowner will need to obtain additional equity from their home in the future, regardless of whether they qualify for a HELOC or a mortgage with the same lender. To make this possible, they have to pay additional fees such as legal fees and more.
Discharge Your Registered Mortgage Charge:
If you want to discharge your mortgage registration charges, you'll have 3 plans to do so:
- Discharge after paying:
If you want to discharge your mortgage charges, you can set them free after paying off your mortgage, with the help of your attorney or notary. You also need to ensure that you do not have any outstanding dues on any related products.
But, if you are considering your home as a collateral for a loan or home equity line of credit, you may not want to discharge your mortgage.
- Discharge before selling property:
With the assistance of an attorney or notary, you will got to complete all steps of the discharge process at your provincial or territorial land registry office. Once the discharge is over, the lender's claims to the property are removed.
- Discharge when switching lenders:
When changing your lenders, your property title information should be updated. Using an attorney or notary, you can discharge the mortgage and continue with your new lender for title to your property.
Key Difference between A Collateral Mortgage and A Conventional Mortgage:
If we talk about the key difference between both of them, then the biggest key difference between them is its terms & conditions, which implies differently.
With a traditional charge, only the amount of the home loan is registered against the property. For example, if you borrow $200,000, your lender will register $200,000 as a liability on your home. Whereas, with a collateral mortgage charge, an amount in excess of the home loan can be registered against the property.
In other words, a traditional mortgage allows the borrower access to lock loan amount with a fixed interest rate, which is payable over an agreed period. Whereas in a collateralized mortgage, the lender commences with the view that the borrower wants to borrow more money within the same agreement in the future and hence may be charged a fee of up to 125% on the value of the property.
Before agreeing to a specific type of mortgage, it is essential that you seek independent advice, especially if you are not completely sure how the terms and conditions of the mortgage work.
This will allow you to make a sounder decision given the fact that you will be bound by the terms and conditions of your mortgage for many years to come.
When you meet with your lender, ask upfront whether the mortgage you'll be offered is a collateralized or traditional mortgage and save yourself the surprise of finding out once you've signed over the next 25 years.
Whatever your situation, before signing a mortgage commitment, it is important that you speak to a knowledgeable and experienced mortgage broker. The right mortgage agent can help you make the best decision for you based on your specific needs, goals and financial situation, and could save you thousands and even thousands of dollars on a mortgage refinance costs in the future.