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December 2010...Understanding collateral charge mortgages

The mortgage world can be confusing - fixed vs. variable, term, amortization, pre payment and other privileges, restrictions, fees for breaking your mortgage early, porting, and other fine details.  And now homebuyers and owners need to consider  a "collateral charge" mortgage versus a "standard charge" mortgage!

TD Bank announced that effective October 18, 2010 all new mortgages will be a collateral charge mortgage. TD Bank joins the many credit unions that also only offer these types of mortgages.  If you are considering a collateral charge mortgage it's worth some investigation before you sign because while there are advantages, there are also some negatives to consider.

Collateral charge mortgages can make it easier for homeowners to tap into their equity if their properties increase in value, although making it harder for them to switch to another lender when their mortgages come up for renewal.

For TD Bank customers, they will now be able to register their mortgage for up to 125% of the value at closing, which allows them to take equity out at no cost should their homes increase in value.  The downside comes at renewal. For consumers who want to keep their options open at maturity, this isn't the best product feature because collateral charge mortgages are difficult to transfer to another lender. That means if someone wants to change lenders for a better rate or product feature, they need to start from the beginning and pay new legal fees.  Technically they can be assigned but lenders don't accept the transfer. With regular standard charge mortgages, you can switch for free, although certain minor charges may apply.

The ability to take out equity is one of the primary features of Home Equity Lines of Credit, which are collateral charges for this reason. In these cases, clients want the ability to extract equity when they need it or as it becomes available.  If you feel that there is a very good chance you will refinance to consolidate debt or to extract equity for a renovation or to invest, then a collateral charge mortgage may be a wise decision.

If you don't believe that you'll need to refinance or extract equity, then a regular standard charge mortgage will suit you fine, and it will give you the ability to move to another lender at renewal should you want to without incurring legal fees. In other words, it's easier for you to keep your options open. 

Whenever the situation looks confusing and complicated, go to a professional. For information on standard charge versus collateral charge mortgages, speak to the experienced professionals at Mortgage Architects. where they only focus on mortgages and what each of their over 50 lender partners have to offer.  They will analyze your situation and help you determine what's right for you - collateral charge or standard charge mortgage, among the many other mortgage options and privileges that you need to consider. 



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