Know Your Mortgage Flavours
Whether you're purchasing a home or refinancing, there can be a lot of mortgage products available. Like going for ice cream (maybe not the full thirty-one flavour spectrum), there's considerable choice (assuming you qualify).
One flavour du jour is the collateral mortgage, including home equity lines of credit.
With a standard mortgage (the vanilla), you borrow a fixed amount to purchase/refinance, the lender secures that amount against your home and you make standard payments for the term.
A collateral mortgage typically secures multiple and future loans: typically, a fixed mortgage and a line of credit (but even credit cards, car loans, etc.). The interest and term are governed by underlying loan agreements with the lender but the security registered against your home is in excess of what you need at the time (up to 100 or even 125% of the home value) and at a higher rate of interest (like prime plus 10%).
The principal benefit to these types of mortgages is that they allow future borrowing without going back and paying additional legal (gasp!) and administrative fees for new registrations. As long as the total borrowed amount is within the parameters of the initial registration, the collateral mortgage provides security for future borrowing.
There are some potential draw backs. First, because the registered amount is so high, collateral mortgages generally preclude secondary financing; and, because the collateral mortgage secures multiple loans, there is risk that you expose your home to mortgage enforcement proceedings if you default on any loan.
Also, switching out can be difficult since, unlike standard mortgages, collateral mortgages tend not to be transferable between lenders; and, depending on your lenders' fees and/or penalty structure, switching out can be quite costly.
This isn't to say that one product is better than another. What is "right" for an informed borrower will depend on particular financial circumstances and anticipated future needs. Some people prefer chocolate over vanilla and others still order that one with raisins in it.
So, it's important that you know your mortgage. Often, by the time you review with your lawyer, the purchase agreement and the mortgage approvals have been finalized and the closing date may be close enough that obtaining alternative financing is difficult if you decide the product is no longer a good fit.
Consider all the work you did to become informed about your home -you should be similarly informed about the way you are securing funds to purchase it. Review with your broker, your banker and other advisors to make sure you understand the mortgage products.
Adam Kowalsky is an associate at the law firm of Cobb & Jones LLP.