Mortgage loans can come with various registration types, including a standard mortgage charge and a collateral charge.
With a standard mortgage charge, the lender will register the lien with the provincial land title or registry office. You may be able to transfer or discharge the mortgage from your lender when paying the balance in full or transferring/refinancing with another lender.
Collateral charges can only be registered or discharged (not transferred) from your lender. These are best if you anticipate the need to borrow more money during the loan term.
Both standard and collateral charge mortgages exist, and lenders may offer both types, while others only provide one or the other. It is important that you understand which option suits your borrowing needs.
What Is a Standard Charge Mortgage?
A standard mortgage charge registers the amount specified in the loan document; it won’t cover any additional loans you may have with them. To borrow more money, you must refinance and re-qualify for a new charge, potentially incurring legal, administrative, and registration fees.
At renewal time, it’s possible to move your mortgage loan to another lender at no cost, an option many mortgage-specializing lenders such as MCAP, First National Financial and CMLS offer. This flexibility provides options such as lower interest rates, and some even offer a HELOC component.
What Is a Collateral Charge Mortgage?
A collateral mortgage charge, like a standard, registers the mortgage amount and an additional re-advanceable charge allowing the lender to lend you more money.
Some lenders have both types of mortgages available. In addition, they may also offer a combination of home financing plans, such as the Scotia Total Equity Plan (STEP), featuring a mortgage and a line of credit component combined.
For those currently in a Home Equity Line of Credit account, this is a collateral mortgage charge and is likely in use not just for borrowing but for credit cards, overdraft protection, car loans and personal lines of credit.
Arguments for collateral charge mortgages.
If you need more money during your mortgage term, you may be able to access your home equity without refinancing the entire mortgage and incurring fees.
For homeowners with both a mortgage and a Home Equity Line of Credit (HELOC) account, a special structure may be in place where every mortgage payment, the amount put towards the principal balance, is added to their HELOC limit.
For borrowers with a strong financial profile and a significant amount of equity in their property, a collateral charge may be the best option. This could include raising their mortgage loan or establishing a home equity line of credit. By obtaining this type of loan, they can access additional funds without needing to pay any costs down the line.
Arguments against collateral charge mortgages.
The collateral charge has a bad rep, with many believing it can be expensive to switch lenders when renewal comes around. Recent trends suggest this is no longer the case. The mortgage market is fiercely competitive, and if you have a good credit history, lenders may offer incentives to switch to them – including no-cost switch programs for collateral charge mortgages, which weren’t available a few years ago. Additionally, such costs are inevitable when changing a material feature of your mortgage like amortization period or loan amount; so these initial costs often don’t matter much either way.
Some people claim that you may be offered less competitive interest rates from your current lender at renewal than you would receive from a new lender. However, if you have a good credit history, then it is likely that lenders will offer low rates. Additionally, your current lender may match or beat other banks’ offers to retain your business. Therefore, this isn’t a huge concern.
Some lenders may register for more than just the loan amount – up to 125% of the appraised value. This can be done by default or upon the borrower’s request, which begs the question, what if home prices decline and the mortgage balance exceeds the home’s current value?
A collateral charge mortgage is a lien on your home and may include other associated credit lines with the same lender. This type of loan allows lenders to access any equity in your property and collect if you have defaulted on these loans or those you have co-signed.
Note that there are also risks when paying out a collateral charge mortgage. For example, some lenders may add delinquent balances from overdrafts, credit cards and lines of credit, leaving you with fewer funds than expected.
Collateral charge mortgages are a great tool when used at the appropriate time. We have seen lenders register more collateral charges in recent years, and while their motives aren’t clear, some suggest it’s being used as a retention tool come renewal time, limiting the homeowner’s options. In the past, charted banks have been scrutinized over their lack of transparency when it comes to collateral mortgage charges.
For this very reason, some financial experts advise not having all of their banking, credit cards, mortgage loans, etc., with the same institution.