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Choosing Between A Traditional and Collateral Mortgage
When it comes to buying a house and securing a mortgage, you have so many options available to you that it can be hard to narrow down what you really need.
For instance, did you know you can choose between traditional and collateral charge mortgages?
You might be wondering, what does this mean? What are the key differences, and most importantly, which is best for me?
Finding answers to these questions can be confusing, especially for first-time homebuyers, which is why we’ve broken down everything you need to know about standard and collateral charge mortgages.
Collateral Charge Mortgage Vs. Standard Charge Mortgage
With any mortgage, your lender will register a “charge” on your land title or deed.
With a standard charge mortgage, the charge is registered for the full amount of your mortgage, and only secures this particular loan. It does not include other loan products you may currently have with the lender or will have in the future.
This means if you want to borrow more money in the future, you will need to re-apply and re-qualify and register a new charge.
But a collateral charge mortgage is re-advanceable, allowing you to borrow additional funds in the future without the need for refinancing your mortgage.
Similar to a home equity line of credit (HELOC), your home will be registered with a collateral charge higher than the actual mortgage amount.
And unlike a traditional, standard charge mortgage, a collateral charge mortgage is not as easily transferable and is more difficult to switch to a new lender.
If there is a line of credit, it can not be switched at all. However, if the lien is a collateral charge but its just a mortgage, then it can be transferred. However, there are some downsides to this as there may be fees associated, or fewer lenders willing to cover the cost of the switch.
Benefits and Drawbacks of Collateral Mortgages
Compared to a standard charge mortgage, the main advantage of a collateral charge mortgage is that it is much easier to borrow additional funds from your lender in the future, as you do not need to go through the process of refinancing and pay the associated legal costs.
However, in certain cases, the drawbacks of a collateral mortgage can outweigh the potential benefits.
Downsides of having a collateral charge mortgage include the fact that:
- It cannot be easily transferred to another lender without being discharged
- The lender can utilize the collateral mortgage to help cover unpaid debts you have with them
- Having a larger amount of registered can make it difficult to secure secondary financing for other things
Who Is This Type of Mortgage Ideal For?
While there are many known disadvantages of having a collateral charge mortgage, this type of mortgage can be a good option if you:
- Need or would like secured line of credit with your mortgage
- Will need to refinance during your term
- Don’t intend to seek out a new lender
A collateral charge mortgage is not without risk. Because it’s more difficult to transfer, by the time of renewal, if you decide you are unhappy with your current lender and want to switch, you may have to hire a lawyer and cough up a fair amount of money to discharge your mortgage.
However, with some lenders, if the collateral charge does not have a secured line of credit, they will allow it to be switched. Some lenders will even cover the cost of the switch, but some will not. This means you will have more limited options if you want to switch.
With a standard charge mortgage, moving to a new lender at the end of a three-or five-year term is much simpler, as your new provider will most often cover any transfer fees.
Also, with a collateral charge mortgage, if you have other credit products with the lender, you run the risk of losing your home if you default on payments other than your mortgage.
How do Standard and Collateral Mortgages Compare?
One of the key differences between standard and collateral mortgages is the amount that the charge is registered for.
With a collateral charge mortgage, lenders can register the charge for up to 125% of the property value.
So, let’s say you purchased your home for $300,000. Even with a $60,000 down payment, the charge can be registered for as high as 375,000, but the amount that you would actually receive is $240,000.
But with a standard lien charge mortgage, if you purchased the same house for the same price and made the same 20% ($60,000) deposit, the mortgage charge would be for the remaining $240,000.
And because the charge is for the actual mortgage amount, a refinance or a second mortgage would be needed to secure additional financing down the road.
While a collateral charge mortgage can sound appealing when you consider the flexibility of securing funds without refinancing, it’s important to consider all the associated risks.
It’s also a good idea to compare the benefits of a collateral mortgage to those of a standard charge mortgage and educate yourself about what each mortgage option entails.
Speaking to a mortgage broker is the best way to gain a better understanding of all the different types of mortgages, so you can make an informed decision going forward.
A mortgage broker will not only help you understand all your available options when it comes to securing a mortgage, but they’ll help you find the best one to accommodate your needs.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.