Thanks Andre - Great information. Mortgage lingo can be convoluted at times, and it's important for people to understand the verbiage.valuemortgage wrote: ↑May 19th, 2017 9:53 amOne must be careful when the word "conventional" comes up, as this may mean something different. See the text below for more details.
Just want to add a bit of information on the subject of "collateral" and "charge", as those words often come up here and there is endless confusion regarding those terms.
First we need to understand what "mortgage" and "charge" are, and that they are 2 completely different things. A mortgage is just a loan, similar to a car loan or any personal loan. You ask a lender for X amount of money, and sign a document attesting you will pay it back. In order to offer low rates on mortgage loans, lenders need to have that loan secured by a collateral, so that in the event the loan is not paid back, the lender has rights registered against the property. To register their interest on the property, the lenders use what is called a "charge", which is just like any other lien. The key difference here is that when the lender asks the lawyer to register that lien, they can use one of these 2 types of charge : a "standard mortgage charge" or a "collateral charge".
Why are they different? Because with a regular standard charge, the lender registers the lien in the exact same amount as the mortgage loan. So, if you buy a $500k property and have 200k downpayment, the mortgage amount will be 300k, and the lender will register a 300k lien (the charge) against it, to "secure" that loan. If you need to borrow more money later on, as years go by and the property value increases, the lender cannot simply release more money to you. They must remove that "charge", or as we often say - it must be "discharged", and register a new lien. Using the numbers above, if the property is now worth 600k and the client wants to get 100k back and refinance that mortgage, the lender would have to discharge that mortgage and register a new one, with a higher amount (matching the new amount required). As the market evolved, more products were created to suit different needs of clients in different situations, so some lenders started offering mortgages that would now be secured by a "collateral charge" (instead of a standard mortgage charge), simply because a collateral charge allows the lender to register X amount against the property and the amount could be higher than the mortgage amount being disbursed. In the example I used above, the lender could ask the lawyer to register a collateral charge against the property in the amount of $500k, even though they were only releasing to the client 300k. The potential advantage to the client is that if he needs 100k later on, the current charge registered ALREADY covers up to 500k, so they can adjust the loan without the need to remove the charge and register a new one.
Now the potential downside of a collateral charge - it cannot be moved from lender A to lender B without the assistance of a lawyer or a title company. What this means is that at the end of your term, should you decide to change lenders because you see a better offer with a different lender, even if you have no intention of cashing out any equity, this transfer from lender A to B would be treated as a refinance, and you would be required to pay a lawyer or a title company some fees, around $1000.00 or so. If you only had a simple standard mortgage charge, you could move from A to B without any legal fees, as standard mortgage charges can be transferred without legal services required.
The thing to remember is that a collateral charge will give you some flexibility ONLY if you need to borrow more against the property value, down the road. A standard mortgage charge would not give you that flexibility without extra costs, however if you dont need to borrow more against the equity, it saves you money as you have more freedom to change lenders without legal fees.
About the word "conventional" - It only means a mortgage scenario where the client has 20% downpayment (if purchasing) or 20% equity (in transfers or refinances). Because the lenders do not need to buy mortgage insurance, this loan is called "conventional". In situations where the down payment/equity is less than 20%, you are required to have the loan insured by CMHC/Genworth, and this loan is NOT called "conventional" - this is what we call a "high ratio" or "insured" mortgage. It still has NOTHING to do with the type of charge, as the charge is simply the lien that will be registered against the property, not the type of loan.
Lenders such as TD bank and NBC use only collateral charges. So, the scenarios below are possible :
A - Client is buying a 500k property with 5% down payment - this is not a "conventional" mortgage because it needs to be insured. This will be a "high ratio" or "insured" mortgage, but TD will tell the lawyer to register a collateral charge to secure the loan. As a result, you will have an insured (or high ratio) mortgage attached to a collateral charge.
B - Client is buying a 500k property with 30% down payment - this does not require insurance, so it will be a "conventional" mortgage, and TD will tell the lawyer to register a collateral charge to secure the loan, just like the scenario above. As a result, you will have a conventional mortgage attached to a collateral charge.
If the lender is First National, Industrial Alliance, Mcap, ICICI Bank, Paradigm, and pretty much all other lenders on the broker channel :
A - Client is buying a 500k property with 5% down payment - this is not a "conventional" mortgage because it needs to be insured. This will be a "high ratio" or "insured" mortgage, but these lenders will tell the lawyer to register a standard mortgage charge to secure the loan. As a result, you will have an insured mortgage attached to a standard mortgage charge.
B - A - Client is buying a 500k property with 30% down payment - this is a conventional loan, as it does not require insurance. This will be a "conventional" mortgage and these lenders will tell the lawyer to register a standard mortgage charge to secure the loan. As a result, you will have an conventional mortgage attached to a standard mortgage charge.
Concierge Mortgage Group