Collateral versus Standard Charge mortgages
More lenders today are moving towards collateral charge mortgages. Why? Because it glues you to “that” lender. It’s not necessarily a bad thing, but you should know what you are signing as it’s becoming increasingly important to understand the difference between a collateral and a standard charge mortgage, and which one best fits your financial needs.
They both have their advantages and disadvantages; it all depends on your preferences and future needs.
Let’s explore the differences.
A Collateral Charge allows you to put one or multiple credit lines of credit to access a portion of your home’s equity for investment, renovation, debt repayment, etc.
Pro: There are no legal fees, cost-effective, reasonably easy to access
Con: You may still need an appraisal to confirm the value of your home. You may even need to qualify for the access; just because they have registered for accessibility does not mean they will grant you access to those funds.
Your mortgage registration at Land Titles may be registered, up to 125% more than the current property value, as the lender anticipates your need and ability to borrow against the future value of your home.
At renewal, you cannot easily move to a new lender for better rates and terms; it’s the gotcha factor, making it easy for the current lender to capture your business as they offer less competitive rates and terms on the next mortgage.
If a second mortgage is needed in the future, a collateral charge will make it very challenging unless your home has a significant amount of equity.
Example: Should you need to finance a heating and cooling system, a lien on the home is typical. Again, if there is a collateral charge in place, you may not be able to proceed.
Should financial hiccups occur, and they do. Your existing lender may seize the current equity to cover the debts that are owed to the lender that holds your mortgage.
For example, suppose you have a STEP/Collatarol mortgage with BIG RED and run into financial glitches. In that case, Big Red will use the equity to the limit of the title registration to pay any debt that is owed to Big Red outside of the mortgage. If other creditors needed to be paid with those funds, they would be out of luck.
Alternatively, when financial hiccups happen, and they do. Other lenders may not assist as the collateral charge takes up the first, second, and sometimes third charge on Land Titles. Another lender may not be able to register their lien on the title.
- Ideal if you won’t need to refinance your mortgage during your mortgage term.
- Ideal if you want to have the ability to quickly and cost-effectively move from lender to lender at renewal
- Most lenders offer a standard charge registration, although you may have to ask for a standard charge as the majority of lenders register a collateral charge. Some lenders offer both traditional charge mortgages and HELOCs that are often a collateral charge. You could choose the option of a second mortgage or line of credit.
- If you borrow more, you have the option of a second mortgage or line of credit with a provider of your choice.
- You are not tied to your lender for your full amortization period: it’s easier to switch lenders at renewal with little or no cost; keeps your options open.
- If financial hiccups happen, and they do. You will have options.
Not all mortgages are not created equal; know your options. I’m here to help.
If this blog is as clear as mud, call me. I am here to clarity, educate, and support you throughout the process. You may only apply for a mortgage a few times in a lifetime; I process mortgages several times a day. Lean on me.