What's the difference between a "secured loan" and an "unsecured loan"?
With a "secured loan," the lender gets a legal interest in one or more of your assets. This asset could be your house (the legal interest is secured when the mortgage is registered on title) or another type of asset (e.g., car, savings bond). Since the lender has an interest in (or "charge" on) one or more of your assets, it can take that asset if you do not repay the loan on time.
Usually, in exchange for the secured interest in your asset, the interest rate on the loan will be lower than with an "unsecured loan."
An unsecured loan is much riskier for a lender, since they do not have a legal interest in any of your assets for the loan. This means that it cannot seize your asset(s) if you do not pay back the loan on time. So, the lender usually charges a higher interest rate on an unsecured loan, to make up for some of the higher risk.
What's the difference between a "line of credit" and a "mortgage"?
A "line of credit" is a loan that is usually used for something other than the purchase of your main home (e.g., home renovations or the purchase of a cottage). It may be a secured loan or an unsecured loan.
While the lender agrees to a line of credit for a full amount (e.g., $100,000), you may withdraw the full amount at one time or withdraw smaller amounts as you need them, up to the full amount. The lender will charge you interest on the outstanding balance.
Often, when you choose to give the lender security for a line of credit, the security is in the form of a mortgage registered on title to your home. This is sometimes called a "collateral mortgage." With a collateral mortgage, the lender gets a legal interest in your property, which may make it harder to sell your property when and if you want to do so. If you have borrowed close to the full amount of the line of credit and there is interest owing on it too, you may find that you owe more money than the value of the property. If you sell your house at this point, you might owe money to the lender on the closing, above and beyond what you are receiving from the purchaser. You will not be able to close the sale of the home without paying all of the money owing to the lender under the secured line of credit.
Also, as with a conventional mortgage, if you do not repay the unsecured line of credit, the lender may seize your property and sell it to obtain repayment of the line of credit. If the line of credit is not secured with a collateral mortgage against your property and you do not repay the line of credit on time, the lender's enforcement options are more limited.
Review these questions with your lawyer to better understand your refinancing:
- Am I being asked to waive legal advice in the mortgage or line of credit documents?
- Is the lender asking for other security (e.g., General Security Agreement, Assignment of Rents) and what does this mean?
- Am I going to have to pay off my credit cards with the advance?
- Are there any additional charges (e.g., mortgage application fees, mortgage broker fees, mortgage insurance fees, title insurance premium)?
- Is the mortgage open or closed and what does this mean? Are prepayment privileges available? If you have a "cash-back" deal with your lender, does the cash-back payment get clawed back if you discharge early? Can you save money over the long term by increasing your payment frequency (e.g., weekly vs. monthly)? Can you pay off the mortgage more quickly with a shorter amortization?
- What is in fact being secured (e.g., credit cards)?
- What will happen if I cannot make a scheduled payment on the mortgage?
- Is the lender requiring a realty tax deposit? Is the lender going to collect realty taxes from you and make payments on your behalf?
- Are you prohibited from placing a second mortgage on the property?
- Where you are refinancing your existing mortgage, are you sure you know the total payout needed? Problems can arise where the existing mortgage secures more than just your purchase of the property and the old lender later requests additional payout funds before giving a discharge.
- Is the mortgage portable if you move?
- Is the line of credit amount higher than you really need, so you are tying up all your equity in the property with this one lender?
- Does the lender's name always have to appear on your fire insurance?
- Are you being offered life insurance (to re-pay the mortgage if you die) and is it a reasonable deal? Is the life insurance portable? You may want to consult with an insurance broker for other options.
- Do you have to notify the lender of any change in your spousal status? Do you need the lender's permission to transfer title among family members, if desired?
Your real estate lawyer can help you answer these questions!
Guarantors & Other Helpful People
Sometimes the lender will assess the income, assets and credit rating of a potential borrower and require additional security on a mortgage loan to this borrower.
The additional security may take the form of another person, either as a guarantor or as the owner of a percentage interest in the property. If a person takes ownership of a percentage interest in the property, they become a mortgagor, like the borrower.
A guarantor agrees to be legally responsible for paying your mortgage if you default on your payments. This person should have independent legal advice (i.e., consult a different lawyer than your lawyer) to discuss the risks to their assets and any property that they own. Their independent lawyer will confirm the identity of the guarantor, review the documents with the guarantor, discuss the risks that the guarantor is undertaking and explain what the guarantor's obligation will be if the borrower defaults on the mortgage. If, at this point in time, the guarantor decides to proceed, the independent lawyer will witness the guarantor's signature on the documents, as necessary.
Sometimes a lender requests a change in ownership to the property, to put another person (e.g., a parent) on title as additional security. There are many risks involved in this type of transfer and it is crucial to consult a lawyer before agreeing to any change in ownership. See the Mortgages and Title Transfers section below for more information on this topic.
Mortgages and Title Transfers
It is crucial to consult a lawyer if anyone is proposing a change in the ownership of the property in order to get the mortgage.
Be especially cautious if you are in financial trouble and someone comes to you proposing a solution.
The many risks to changing the ownership to a property include:
- If there are any outstanding judgment(s) against someone who gets a registered ownership interest in the title, these judgment(s) can bind the land and would have to be paid in full before the new mortgage can be registered;
- For the person taking a registered ownership interest in the property, there can be liability risks for their other property, including other family property;
- If a person has taken a registered ownership interest in a property and their marriage subsequently breaks down, their spouse may be able to claim an interest in the property;
- There are tax implications to property transfers, including GST and capital gains issues;
- Property ownership may affect eligibility for social services.
Consult a real estate lawyer to discuss these risks in a thorough fashion. If you do not have a lawyer, use the Locate a Lawyer function to find one in your area.