A lender can register a mortgage in one of two ways: with a mortgage charge or with a collateral charge. The lender will register your home with your municipality’s/provincial land title or registry office, and the mortgage can then be recorded, transferred, or dismissed from your lender.
A collateral charge, on the other hand, can only be registered with your lender or dismissed (not transferred).
When you think you’ll need to borrow more money during the duration of your mortgage, a collateral mortgage makes sense. Continue reading to see why this occurs and how it affects your mortgage.
What is a Collateral Mortgage?
A collateral mortgage is a readvanceable mortgage, which means that if the value of your home rises, your lender can offer you additional money without having to renegotiate your mortgage. To do so, the lender registers your home with a collateral charge, similar to how they do for a home equity line of credit, and can do so for a larger amount than the mortgage loan amount you require.
You can borrow money from your home at any moment without having to renegotiate your mortgage if you register it with a collateral charge. This makes future borrowing from your present mortgage lender easier and less expensive, because you won’t have to pay the legal expenses associated with hiring a real estate lawyer to assist you with a refinance.
How to Get a Collateral Mortgage
Obtaining a collateral mortgage is simple, but there are a few stages involved.
Suppose you’ve paid $500,000 for a home and put down a 20% down payment ($100,000). That means a $400,000 mortgage is required. A collateral mortgage of up to 125 percent of the value of your property may be available from your lender. That means your collateral mortgage might be valued at $625,000 ($500,000 multiplied by 1.25).
Every lender has their own set of standards for determining how much extra money they’ll register as security for a mortgage. Some lenders might not always allow you to borrow more than the original loan amount. In either case, you can borrow up to 80% of the appraised value of your property (excluding what you still owe) under government restrictions, which is especially useful if the value of your home increases.
Let’s imagine you’ve owned your property for a few years and the property’s worth has increased by 10%. You’ll have more money if the value of your property continues to rise. However, you’ll only be able to borrow up to $625,000, which is the initial value of your collateral mortgage.
How is a Collateral Mortgage Different?
In a nutshell, a conventional mortgage gives the borrower access to a fixed mortgage amount with a fixed interest rate, repayable over a specified time period. A collateral mortgage is similar to a traditional mortgage in many ways (it has an agreed-upon interest rate and term).
But the lender assumes the borrower would wish to borrow more money in the future under the same agreement, which is why up to 125 percent of the property’s value may be placed as a charge. As a result, the recorded collateral mortgage will be greater than the amount of the mortgage obtained by the borrower.
For example, if you want to buy a $300,000 property with a 20% down payment, you’ll need $240,000 in conventional financing at a 3.5 percent interest rate over 25 years.
Pros and Cons of a Collateral Mortgage
Some people regard collateral mortgages as having potential benefits, while others are strongly opposed to these financial products. Understanding the benefits and drawbacks of a collateral mortgage is important to determine whether it is the correct mortgage for you.
- Funding availability
A collateral mortgage allows you to access the equity you’ve built in your property if you need money. You can put the money toward anything you want, including home improvements or paying off high-interest debt.
- There will be no legal fees
Because a collateral mortgage is set up from the beginning, you won’t have to pay any additional legal fees when borrowing the funds, unlike when refinancing.
- Switching lenders may incur fees
Because collateral mortgages are registered with the lender, even if your term is up, you may be required to pay costs to transfer your mortgage to a different lender.
- You’re tempted to use your equity
Because of the easy availability of finances, some homeowners may be tempted to utilize their equity as an ATM and withdraw money from it on a regular basis. This raises the amount of debt you owe, which must be paid off eventually.
Collateral mortgages are appealing because they allow you to immediately access the equity in your property without incurring any costs. With interest rates as low as they have been in recent years, collateral mortgages can be a good way to borrow money at a low cost.
Remember that if you receive a collateral mortgage, you get to determine the amount (up to the limit set by your lender). Even if your lender provides up to 125 percent of the value of your property, you can be a little more cautious and simply register for the exact amount.
Lenders Who Offer a Collateral Mortgage in Canada
There are several, banks, and lending institutions that can provide you a collateral mortgage in Canada, however, TD Bank and ING DIRECT are the two most popular collateral mortgage lenders. If you are looking for a collateral loan you should consider reaching out to these lenders.
You can also hire a mortgage broker to scope the market and find the best deal for you. This can simplify the research and application processes for your mortgage.