What is a collateral switch mortgage?

Before answering the question, what is a collateral switch mortgage, we should first answer the question, what is a collateral mortgage?

A collateral mortgage is a mortgage where the lender has registered a larger amount on title on the home than the mortgage amount. For example, Scotiabank will do a “STEP” mortgage or RBC will do a “Homeline”. What happens in these cases is that the lender registers an amount on title that is larger then the mortgage amount, and the difference is available as a HELOC (home equity line of credit).

For example: let say you have a $300K mortgage and a HELOC with a $100K limit and a zero balance (you haven’t used any of it yet in this scenario). The collateral mortgage registered on title on the home will be the combined amount of $400K. Then, let’s say in a year from now, you have paid down the mortgage by $25K. Now the mortgage balance went from $300K down to $275K. Guess what the new limit on the HELOC is? It’s $125K. And that happens automatically. Pay down the mortgage another $25K, the new balance of the mortgage $250K and the HELOC limit has increased to $150K. In other words, the sum of the mortgage + HELOC is always $400K.

Now let’s say that during your 5 year term (assuming you were in a 5 year term), you’ve used $50K of the HELOC and your mortgage is coming up for renewal. If you don’t want to renew with your current bank, you can do what is called a “collateral switch”. That’s where you take the collateral mortgage and move it to a new bank. What is unique about that, is that you get the best terms on a switch. When you switch lenders, you will get the best rates and they will pay for any appraisal and they will pay any legals costs!

The other benefit is that you can take the mortgage and the HELOC and combine them together. Normally this would be considered a refinance, but since you are not increasing the amount registered on title, it’s not a refinance. Why is it important to avoid refinancing? Because refinances are considered what’s called “uninsurable” and an uninsurable mortgage does not give you a very good rate.

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