Comparing Apples and Oranges

I spoke with a prospective client who had a mortgage loan approaching renewal. We had a brief discussion regarding income, debts, credit and appraisal and what their financial goals were. The prospective client submitted the documents and after reviewing the documents, I discovered that a collateral mortgage was registered on the property.

Many real estate agents, mortgage agents and mortgage brokers will give anyone who asks their opinion as to what a collateral mortgage is. I always do my research and get facts not opinions.

I found the following information from real estate lawyer, Douglas Gray, real estate lawyer,

A collateral mortgage is…a form of insurance or protection for the loan that is filed against the property. The payment requirements on the loan are covered in the promissory note, and once the promissory note has been paid in full, the collateral mortgage will automatically be paid off. 1

Only once the debt is paid can the collateral mortgage be discharged from the title of the property.

A collateral mortgage is commonly offered by TD Canada Trust and Bank of Nova Scotia. A collateral mortgage does not cover only the mortgage loan amount, it has several components of the debt owed, a mortgage, a line of credit and it could include outstanding credit card debt, and any future amounts borrowed. Borrowers who choose these mortgages do so because it is easier to borrow additional funds without changing the mortgage contract.

The way it works is a dollar value much larger than the amount of the mortgage alone gets registered on the property. For example, the property value is $500,000, but the mortgage needed is only $250,000. The bank will register a collateral mortgage of $500,000 on title. It will consist of a mortgage and a line of credit. All debts secured by the collateral mortgage must be paid before the collateral mortgage can be removed from title.

With a conventional mortgage, each time money needs to be borrowed as a mortgage loan, the existing mortgage balance will be paid in full and then the new lender can take over the mortgage and a new mortgage amount will be registered. No other debts need to be paid.

The prospective client wanted to renew the mortgage, not the line of credit. Also, the existing lender of this prospective client was quoting insured mortgage interest rates although this collateral mortgage was not a mortgage which qualified for insured mortgage rates. Insured rates are for those borrowers whose property value is less than $1 million and borrow up to 90% of the value of the property and thus will have to purchase mortgage insurance from the Canada Mortgage and Housing Corporation, Canada Guaranty or Sagen.

I tried several times to explain this to the prospective client, but they became very impatient, angry and abruptly stated that if I could not offer an interest rate lower than what the existing lender was offering then there was no reason to continue the discussion. The prospective client completely ignored what I had explained. I tried following up with a telephone call and an e-mail but to no avail.

Well, there it goes again, a prospective client thinking that I am being difficult. I try my best to provide borrowers with the necessary facts and knowledge to make an informed decision. Sometimes it is appreciated and other times not so much.

Footnote

¹ Gray, Douglas. Mortgages Made Easy, John Wiley & Sons Canada Ltd. 2006, p. 94