Collateral Charge Mortgages
What is a collateral charge?
The lender has your lawyer register more debt on title than you actually owe. It is important to understand this does not increase your actual debt or harm future qualifying for a mortgage.
What are the benefits of a collateral charge mortgage?
A collateral charge allows the lender is able to increase the loan size without changing the charge on your property’s title. The benefit to you is the ability to increase your home equity line of credit (HELOC) limit beyond the original amount without breaking the mortgage or paying legal fees.
What are the disadvantages of these types of mortgages?
When your mortgage comes for renewal it is slightly more expensive to change lenders (typically around $400).
** It is also important to note that most lenders retain 85-90% of their renewal business. Scotiabank retains well over 90% of its mortgage renewals. The reason for this is typically because lenders have very little cost to renew your mortgage and require minimal paperwork (usually just signing renewal papers). You generally do not need to requalify to renew your mortgage. For a new lender to acquire a renewal they must fully underwrite the mortgage file, collecting all of your personal documents (Thing income, property, and asset documents). This difference allows the renewing lender to offer far more aggressive rates which we help our clients obtain.
The second disadvantage of these products is a lender’s ability to claim unsecured debts against your home. An example would be taking a large unsecured loan for a sole proprietor business with the same bank and defaulting on it.
The simplest way to avoid this is obtaining large unsecured loans with other lenders that do not have a collateral charge on your home.
We are always here to help our clients navigate this planning.
Readvancable Mortgage Products and how they can help home owners and real estate investors
What is a readvancable Mortgage?
A readvancable mortgage works as your mortgage is paid down by you or your tenant. Every payment reduces the debt you owe on your mortgage and becomes available on your home equity line of credit (HELOC). You are able to access the paid down funds through your HELOC. Some lenders have this adjustment happen automatically while others require you to go into a branch and request the HELOC increase. Other lenders have the HELOC increase in relative real time and others have delays. We specialize working with clients to find the correct overall product to maximize these benefits and avoid any drawbacks.
What are the benefits and uses of a readvanable mortgage?
Readvancable mortgage products offer greater financial flexibility as you have access to cheap funds with quick notice. These funds can be used for repairs, renovations, down payments for investment properties, investments as well as personal needs and vacations (not suggested). Having access to these funds can allow you to grow a real estate portfolio or investment portfolio far quicker than by simply saving. Borrowed funds used for investment purposes are generally tax deductible** as well. This can significantly improve the performance of your investment, increase your return on investment and minimize your cost of borrowing.
What are some disadvantages with readvancable mortgage products?
One disadvantage can be limiting your lending options based on the product you are looking for. In our experience, this can result in paying roughly 0.1% more than restricted or simpler mortgage products. For the vast majority of clients the benefits outweigh the drawbacks.
Some lenders debt service the limit of HELOC’s and having access to these funds can reduce your total borrowing power. If this is a barrier our solution to this is having the lender only increase your HELOC limit at your request as well as the ability to close the HELOC if needed.
** Always speak to an accountant about tax matters.
How can these mortgage products befenefit real estate investors?
These products can be combined on investment properties to drastically accelerate portfolio growth and minimize mortgage penalties and legal fees.
Increased ability to acquire down payment for future investments properties faster.
The combination of these products allows the investor to access principle paydown as well as the appreciation of the property. This can allow investors to have a higher degree of control with their real estate portfolio growth.
Avoid penalties and minimize costs to maximize return on investment.
Not only can the investor increase the total lending limit beyond the original loan, they can do so without triggering mortgage penalties or legal fees. As a real estate investor myself I always prefer to minimize unnecessary or avoidable costs to boost my return on investment while reducing my overall risk.
Reduce accounting costs and easier book keeping.
The ability to have up to three mortgage and three home equity line of credit components as a minimum (some lenders allow for more). This allows you to keep your tax-deductible and non tax-deductible debt separate on your residence as well as separating funds borrowed for different investments. This can make filing your taxes easier and can reduce your accounting fees. We always suggest working with an experienced accountant who understands real estate investing. If you are looking for someone exception send me an email – Keaton@KBMortgages.ca and I can help you find the right accountant.
Ability to pay off the debt on your primary residence significantly faster with the Smith Manoeuvre.
We are Smith Maneouvre Certified Professionals and work directly under Robinson Smith to help Canadians implement the strategy alongside other Smith Manoeuvre Certified Professionals like accountants and financial planners. To learn more about how to reduce the cost of your mortgage and to create wealth for retirement click here. Let us know if you need any type of professional, we are here to help however we can. Our goal is to help you improve your retirement, pay off your mortgage faster and to minimize the total cost of your mortgages. We achieve this by maximizing tax deductibility and positioning you to keep your equity working for you.
If you would like to connect for a call to chat – you can reach me here.
Here are two podcasts we have been guests on about the strategy.
Thanks for reading and I hope you have an amazing day!
To lock in your variable mortgage or stay fixed
It’s a question many people are debating right now. As a mortgage broker I get asked about this daily.
Should I lock in to a fixed rate mortgage?
increases overnight. This is because fixed rates are roughly 2% higher
than variable rates currently. On top of this locking into a fixed rate
increases prepayment penalties by almost 800%.
The numbers behind the fixed vs variable debate
Here is some quick math on the average interest rate over 5 years (broken into 8 sections per year as the Bank of Canada increases rates). I have marked the increases in orange.
spreadsheet I used for this math if you want to run your own rate vs your lock-in options.
John Fixed and Jane Variable – A tale of two borrowers
4.15% to market rates of 6.6% (5-year fixed) and Jane adjusts from 5.6%
to a similar variable product.
When does a five year fixed rate make sense?
Why do I often suggest Variable Rate mortgages?