I got my fist mortgage over 20 years ago, and at the time I was only concerned about two things - term length and rate. I hadn't heard about HELOCs, and my mortgage broker did not discuss portability, prepayment penalties, debt service ratios, or my credit score. Even today, my experience is that only a minority of mortgage advisors will get into those details, or discuss the difference between a conventional and collateral charge. So in this post I'll discuss some of those details and explain why you may want to pay attention to them.
The subject of collateral charges has been given some attention in the media in the past few years, and most of what I've read has been negative. I don't think collateral charges are a necessarily a bad thing, and sometimes a collateral charge is better than a conventional charge.
Technically the difference between a collateral charge and a conventional charge has to do with how the mortgage is registered in the provincial land titles registry. From a borrower's perspective, the primary difference is that a collateral charge can be used to secure additional loans such as a HELOC, a personal loan, or even a credit card. Some people suggest that collateral charges are readvanceable, but that is not always true. Specifically, it depends on how the lender requires the collateral charge to be registered. BMO, with their ReadiLine product, instructs lawyers to register the collateral charge for the initial principal amount of the mortgage, which means additional borrowing requires a new mortgage registration and the associated legal fees. Scotia, when the mortgage is under their STEP product, does not specify an amount, which means it is readvanceable. I'm informed that TD registers the charge with an amount that exceeds the mortgage principal, which means it is also readvanceable, at least up to that amount.
The argument that a conventional charge is better because it allows you to switch lenders without incurring the legal costs of a discharge and new registration is also not entirely true. In a recent conversation with a "Premier Relationship Manager" at HSBC, I was told that they will not take an assignment of another lender's mortgage, even when it is a conventional charge. I suspect HSBC is not the only lender that wants to ensure that their specific mortgage terms are registered on title when they lend.
I think a readvanceable mortgage is worth considering when you intend to purchase and renovate a property. While an unsecured line of credit would be an option, they generally have an interest rate that is 1-2% higher than a secured line of credit (HELOC) that you can add to a collateral mortgage.
Portability is another mortgage feature that most borrowers should pay attention to. If you sell your house before your mortgage term is up, you can take out a mortgage for an equal amount on your new property and avoid prepayment charges. While most mortgages are portable, I recently found out that Scotia's "value" mortgages are not.
When discussing the mortgage terms with your lender, I suggest asking them to show you the contract clauses that specify the details such as portability and prepayment options. Since most mortgage contracts are boilerplate documents that have clauses covering every different mortgage the lender offers, I'd even ask your lender to initial beside the clauses that apply to your mortgage. Also, have your lawyer confirm the detail when you meet with them, as your lender could make a mistake in the documents and instructions that are sent to your lawyer.
I considered trying to explain mortgage prepayment penalties and interest rate differentials, but that's a topic only an accountant can find exciting. If you choose a variable rate mortgage, it's simple because the prepayment penalty is always three months' interest. If you are inclined to choose a 5-year fixed rate mortgage, I suggest giving serious consideration to a 4-year fixed instead. When you do the math, prepayment penalties on a 5-year fixed mortgage can often be double the penalties on 4-year fixed.
