When shopping for a mortgage, it’s easy to get lost in the fine print. And not all mortgages are created equal. There’s a major distinction that you should be aware of: collateral mortgages vs. conventional mortgages.
With a conventional mortgage, the amount registered is the amount you need to borrow, so, for example, the value of your house minus the amount of your down payment. However, with collateral mortgages, the amount that’s registered is the full value of the house, and can, in some cases be up to 125% of the value of your property.
Collateral mortgages are becoming more popular. In 2010, TD made a major shift: the bank was no longer offering conventional mortgages; all its mortgages would be collateral. ING made a similar move in 2011.
According to TD, collateral mortgages allow homeowners to more easily access credit, allowing them to borrow more without additional charges. In an e-mail, TD wrote:
“A collateral charge registration will allow a customer to borrow in the future without requiring a new registration. In contrast, a conventional mortgage would require a new registration if there are changes or increases in the amount of the mortgage.”
However, many experts are concerned that collateral mortgages mean less choice and flexibility for consumers.
One concern is that while it can be relatively easy to transfer your conventional mortgage at the end of your term to another lender, a collateral mortgage can be more complicated, and expensive, to move, says mortgage broker Steve Garganis.
Shopping your mortgage around at the end of your term, experts advise, can save you a lot of money. While most homeowners renew their mortgages with their current lender, shopping around can save you 0.5% to 1% on your interest rate – which can mean a huge difference in how much you have to pay.