Trish Bongard Godfrey

Need To Know | Conventional vs Collateral: What difference does it make?

  • Trish Bongard Godfrey
  • 24 April 2017

MORTGAGE UPDATES

Although they share much of the same DNA, conventional and collateral mortgages have crucial and consequential differences.

Conventional Mortgages Are Known Quantities.

The interest rate, the amortization period, your monthly payments and the day your mortgage will be paid in full are all clear. Unless you refinance, the outstanding balance gradually goes down.

At maturity – after a 5-year term, for example – you can renew at the then current rate, or transfer your mortgage to another lender at no cost. You can also get a second mortgage or a line of credit.

Collateral Mortgages Look Conventional – but with a Twist.

Here, your property becomes the collateral for a promissory note issued by the lender.

The upside? You can often have your collateral mortgage registered for up to 125% of the value of the property – extra money to tap into later.

Red Flags on Collateral Mortgages

  • Lenders will not transfer or switch a collateral mortgage – ergo, no competitive shopping unless you discharge it first and pay fees to have a new mortgage registered.
  • If you want to refinance and this lender says ‘no’, you’ll have to go elsewhere – which means discharging the mortgage and paying a penalty.
  • Your lender can use your mortgage to pay out other debts you have with them, including loans or credit cards.
  • Products that include a Line of Credit are all registered by the major banks as collateral mortgages.

Collateral Damage? It Never Needs to Happen.

You simply must ask the right questions.


This post has been provided by Hanley Mortgage Group
Darlene Hanley
Mortgage Agent M008003191