When securing a mortgage, understanding the differences between a mortgage charge and a collateral charge is crucial.
These two methods influence your borrowing potential and flexibility. With a mortgage charge, the lender follows a standard path, registering your home with the local authority or registry office. It offers flexibility, allowing for the transfer or discharge of the mortgage as necessary and granting a certain level of freedom in managing your mortgage terms. On the other hand, a collateral charge brings in a different dynamic. Under this arrangement, the mortgage can solely be registered or discharged, removing the option for direct transfers between lenders. The complexities of a collateral charge demand attention, particularly in understanding how this choice impacts your mortgage journey.
What is a collateral mortgage?
A collateral mortgage is a loan where your house acts as security. When you get this kind of mortgage, the lender gets a claim against your property. It’s like a safety net for them if you can’t repay the borrowed amount. This type of mortgage allows you to borrow more money if needed during your mortgage term. While it offers flexibility for borrowing, it’s essential to know its potential limitations. Think of a collateral mortgage loan like a piggy bank tied to your house. It’s like a Home Equity Line of Credit (HELOC) where you can borrow more cash whenever needed, but you must stay within a set limit. With this mortgage, the bank has a strong claim on your home for the amount you borrowed, which could be up to 125% of the value of your house.
How is collateral mortgage calculated?
Calculating your collateral mortgage involves a few key steps. Let’s break it down:
Step 1 – Determining the Registered Home Value: To find the registered home value for your collateral charge mortgage, you start with your home’s value and multiply it by the maximum percentage of the home value your lender provides. For example, imagine your home is valued at $600,000, and your lender offers a maximum percentage of 125%.
$600,000 (Home Value) x 125% (Max percentage of home value) = $750,000 (Max Registered Home Value).
Step 2 – Calculating Your Available Equity: Suppose you can borrow up to 80% of the registered home value and currently owe $250,000 on your mortgage. To determine how much you can borrow against your home’s equity, you use this formula:
$750,000 (Max Registered Home Value) x 80% (Max Loan-To-Value Ratio) = $600,000
$600,000 – $250,000 (Amount Owed On Mortgage) = $350,000 (Equity Available).
Understanding the Expenses of Changing Collateral Mortgage Lenders
It’s essential to understand that a collateral mortgage loan functions in a different way than a conventional one. Unlike a traditional mortgage charge that can be easily transferred to a new lender, a collateral mortgage isn’t registered at the municipal registry office. If you refinance with another lender, you must discharge and register the mortgage, incurring legal fees again. Moreover, your current lender might require repayment of any other loans tied to your mortgage.
Switching lenders with a collateral mortgage involves more than a simple handover. It’s a process that incurs specific costs and considerations you should know. Here’s what to expect:
- Discharge Fees: Discharging a collateral mortgage means cancelling it with one lender to start fresh with another. This process comes with its own set of expenses. Expect to cover administrative discharge fees, which vary by province but generally range from $200 to $400.
- Legal Expenses: Legal fees become part of the equation when shifting lenders. These typically fall between $400 and $2,500, covering the legalities of discharging and registering the new mortgage.
- Penalty Costs: The penalty for leaving your current lender varies and can be calculated using a mortgage penalty calculator. Generally, this penalty falls between $2,000 to $6,000. It’s advisable to consider switching only if the new mortgage offers a significantly lower interest rate.
Pros and cons of a collateral mortgage
Pros:
- Access to Additional Funds: Collateral mortgages offer the potential to borrow more money against your home’s equity during your mortgage term, providing financial flexibility for future needs.
- Streamlined Borrowing: With a collateral mortgage, accessing funds doesn’t require refinancing your entire mortgage. It’s a re-advanceable product, allowing you to tap into your home equity without extensive paperwork.
- Flexible Repayment: You can put extra funds toward your mortgage principal or re-borrow funds you’ve already repaid, enabling greater control over your repayment strategy.
Cons:
- Costs of Switching Lenders: Changing lenders with a collateral mortgage can be pricey due to discharge fees, legal expenses, and potential penalties, making switching more expensive than conventional mortgages.
- Potential Transfer Limitations: Unlike conventional mortgages, collateral mortgages restrict your ability to directly transfer the mortgage to another lender, limiting your options if you seek better terms elsewhere.
 Which lenders offer collateral mortgages?
Some notable institutions offering collateral mortgages include RBC Royal Bank, TD Bank, CIBC, BMO, Scotiabank, National Bank of Canada and Tangerine
The Bottom Line
Choosing a collateral mortgage requires an in-depth understanding of its expenses, especially when considering lender shifts. Knowing the steps, like the borrowing potential or the limitations, gives you the confidence to navigate this unique territory. While collateral mortgages offer perks like extra borrowing power, they also come with a -price for switching lenders. Choose your financial partners wisely! With this understanding, you can dominate the mortgage landscape with confidence.
