Collateral mortgages a hot topic

There has been a lot of interest in collateral mortgages since CBC’s Marketplace took a stab at TD Canada Trust’s product on January 27, 2013.

Up until a few years ago, most mortgages were registered as a standard charge mortgage. The major decisions were to opt for a fixed or a variable-rate mortgage and what term to select.

In 2010 some banks switched to collateral charge mortgages. Traditionally, Home Equity Lines of Credit (HELOC) and revolving credit lines are considered collateral because they allow borrowers to readvance their loan, to access extra funds, without re-negotiating. Collateral mortgage charges register loans at a certain percentage of your property, up to 125%, regardless of the initial amount borrowed. If your home is valued at $250,000 and you borrowed $200,000, a mortgage could still be registered against your home for $312,500.

With a standard charge mortgage, you agree to how much you’re borrowing, the interest rate, and the term. So if your home is valued at $250,000 and you have $50,000 down, then your mortgage is $200,000. And with a standard charge your mortgage is registered at $200,000. If you wanted a line of credit, for example, you would have to reapply.

With collateral mortgages, the bank thinks you will likely want to borrow more money in the future so it is establishing a global limit. The reasoning is that it will cost consumers less because there are no additional legal fees if the customer needs to refinance. Another reason is that it keeps customers from moving their mortgage business elsewhere.

There are pros and cons to collateral mortgages with the banks having the advantage. It’s an okay product for homeowners who want extra borrowing ability along with their mortgage but it’s not for everyone.
“Yes, homeowners can refinance throughout the term without incurring legal costs as long as they’re not asking for a total loan greater than the collateral charge at the time of renewal or refinance, said Steve Nipius, TMG’s Deal Centre Manager. “However, if a homeowner only has a 5% or 10% down payment, then it’s pointless to have a collateral charge.”

The cons may outweigh the pros. First of all, if a homeowner wants to switch to another lender, they are forced to pay legal and registration fees. More importantly, most banks won’t allow transfers because of the other loans tied to the collateral charge. This makes it harder to leave the lender since all your debt, if any, is under one agreement.

“Banks know there are costs involved to the borrower if they decide to move, so there no need to offer the best rates, “Steve said.

Also, consider this scenario: Your mortgage is in good standing but you default under a credit line with the same bank. The bank could, in most cases, start default proceedings under your mortgage, meaning you could lose the house.

However, if you carry a lot of debt, require a readvanceable loan and frequently need access to cash, a collateral mortgage will save you money in the amount of legal fees you are paying.

But, if you want to the freedom to move your business elsewhere, it’s not likely the best option. Collateral mortgages mean less choice and flexibility for consumers. Most experts advise to shop around at the end of a mortgage term because you can save up to 0.5% on your interest rate, which can translate into substantial savings.

Getting a standard or collateral charge mortgage is just another complication for many homebuyers and owners. Get advice through your mortgage professional whose focus is on mortgages and who deals with a variety of lenders to get the best mortgage for your situation.

Canadian economy to spring back into life

Once again, Canada looks to the US for signs of life and after more than three years, the U.S. is poised for economic recovery.

 As dependent as the country is on the economic health of the United States, and indeed, the rest of the world, the government’s fiscal policy and the Bank of Canada’s astute predictions, have put us in a solid position for future growth, despite the slowdown in the real estate sector and manufacturing sectors.

On a positive note, U.S. housing starts surged 12.1 per cent in December, the fastest since June 2008.  Economic recoveries are usually led by a surge in home building. Banks offer low interest rates, and consumers take advantage to buy big items like houses. Then they buy furniture and other items to put into their homes. Construction companies start to hire, which bumps up consumer demand for goods and services, then economic growth bops along at a nice pace.

The U.S. Fed chairman Ben Bernanke said that 2013 could be a “very good” year. The early signals are good ones, which is also a good sign for the Canadian economy and the jobs market and the real estate market.

In Canadian real estate, there has been a slowdown in a few areas of the country -- Vancouver is one -- with prices and sales cooling, especially in the condo market.  However, the surrounding areas of Vancouver are already showing signs of activity.

Alberta is still expected to see strong growth despite a slight slowdown in major centres. Areas outside Edmonton and Calgary are active as well.

Sakatchewan and Manitoba have not really seen a slow down, but are experiencing a lack of inventory.
Ontario is a smorgasbord of activity – slow in some areas and strong in others. Reports have Toronto’s condo sales slowing, which Finance Minister Jim Flaherty was most concerned about in Toronto as well as in Vancouver.  Mid-month figures released by the Toronto real Estate Board show a 2.5 per cent rise in home sales compared to the year-ago period.

In the Atlantic Provinces Nova Scotia is still strong.  RBC Economics predicts that Newfoundland’s economy will swing from a bottom position in the 2012 provincial growth rankings to top spot in 2013. PEI is expected to remain the same.

It will be important to watch two things. The first is employment gains. More jobs mean an increase in economic growth. Second: real estate sales trends as we move through the first quarter. The stricter guidelines imposed by the government last year had home buyers move to the sidelines. Over the next few months, we’ll be able to see if they remain there or decide to move forward towards purchasing a home.

The U.S. Fiscal Cliff and Canada

The term “fiscal cliff” has conjuredup a powerful image of the U.S. economy falling into a pit so deep that there was no hope of climbing out. The ramifications of that mighty fall would be felt around the world, with the idea that without the U.S. world economies would stagger and fall into their own abyss.

Fortunately, the U.S. government came to an agreement last Tuesday – New Year’s Day -- that averted the downfall. Global markets responded positively to the news.  Stocks, commodities and some currencies like the Canadian dollar have rallyed in the wake of the agreement to deal with a combination of tax hikes and spending cuts that threatened to plunge the U.S. back into recession.

While the cliff has been avoided, there is still plenty of unresolved business to be completed over the next couple of months.

It was U.S. Federal Reserve chairman Ben Bernanke who coined the term “fiscal cliff” and wanted American politicians and their constituents to feel his alarm over this "cliff" and the economic danger it posed. Although aimed at a U.S. audience, the whole world was listening. The general consensus seemed to be that if the Americans couldn’t figure out a way of avoiding the cliff, the potential damage caused by that failure on the Canadian and the global economy could be huge.

What was the fiscal cliff?

The “cliff” referred to the more than $600 billion U.S. worth of spending cuts and tax hikes that were due to automatically take effect as of Jan. 1, 2013. Most of this $600 billion – about $500 billion – was in tax hikes that would have hit the vast majority of Americans. The spending cuts amount to about $110 billion. The term “cliff” was a bit of a misnomer since the full impact of those spending cuts and tax hikes would not takes place on January 1, but were spread out over the whole year. So, if an agreement took place over a few months, the economy would still have been okay.

Why would Canada care?

Bilateral trade between Canada and the U.S. amounts to more than $1.7 billion a day. It’s vital for Canadian exporters to have a financially healthy and confident U.S. consumer. TD deputy chief economist Derek Burleton noted that U.S. tax hikes have a bigger impact on Canadian exports than spending cuts, which tend to matter more domestically because Canadian trade with the U.S. is largely concentrated in consumer goods and business investment – items which will likely be hit harder by an increase in taxes.

What now?

Still a risk to the U.S. economy  is how $110 billion in spending cuts that have now been delayed for two months in this agreement will be tied to an increase in the debt ceiling that will be required by February or March. For now markets are surging and confidence is high.