Arbitration, Back-End Ratio & Collateral Mortgage


In our re-vamped weekly segment, Common Cents Wednesdays, we help explain simple-to -complex financial terms. This week, we’re covering ‘arbitration’, ‘back-end ratio’ & ‘collateral mortgage’. It might sound like a super dry read, but since you’re in the “Cafe” grab a Timmies doughnut to sweeten the knowledge.
We won’t tell.


Arbitration is basically a quicker and generally less expensive means of conflict resolution in which an impartial third party, agreed upon by all sides, makes the end decision, also called the “award”. The award is legally binding and it’s enforceable. Arbitration is generally used when the matter at hand is very technical, if the matter needs a speedy resolution (it’s faster than litigation) and have a higher tendency to be confidential due to their nature (they’re often non-public). Arbitration can be either voluntary or mandatory.

A simple example of arbitration: your child breaks something that belongs to your neighbour. Your neighbour needs compensation to repair the damage, but doesn’t want your child to get into legal trouble. In this case, both you and your neighbour seek an impartial third party to find a reasonable award for the damages.

Back-End Ratio

Back-end ratio, in terms of loans, is the portion of someone’s gross income that ends up going towards debt, such as car payments and student loans. Lenders will use back-end ratio when determining whether or not to extend or increase credit to the borrower. The lower the borrowers back-end ratio is, the more likely they are to receive a loan. Low back-end ratios are most important when searching for a mortgage.

Collateral Mortgage

A home financing tool, a collateral mortgage is a loan backed up by a promissory* note. Basically, with such a mortgage, you have a determined interest rate and term. The difference between a collateral mortgage and a conventional mortgage, however, is that the former registers a charge for up to 100% (with ING bank) or 125% (TD bank) of your home’s value verses the amount you need to finalize your transaction, as long as you have 20% of your homes equity as a down payment.

The advantage to a collateral mortgage verses a conventional one is that it makes it easier for you to get access to your equity for any desired renovations or property investments. The downside will hit at renewal time. If you want negotiating power with your bank, then a collateral mortgage might not be for you.

Why is this? If your lender doesn’t offer you a better rate or the feature you’re looking for at renewal time, it will be costly to transfer to someone else, since you’ll technically have to start from scratch – new legal fees and all. With a conventional mortgage, you can transfer to another lender for free.

*Promissory Note: Exactly what the word implies – it’s a promise to pay by a fixed date or on demand a sum of money.

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