Collateral Charge

Definition

A Collateral Charge mortgage is a  re-advanceable mortgage meaning that your bank or lender can lend more money when the property value increases without having to refinance. The lender registers the mortgage with a collateral charge, similar to a home equity line of credit, and can do this for a higher amount than the mortgage loan.

When registering a collateral charge mortgage in Canada you are then able to borrow money from the home at any time up to 125% of the value of your home. This makes future borrowing much easier, and cheaper, as you would not have to refinance. You are then able to avoid all legal and processing fees associated with refinancing.

Collateral Mortgage vs Conventional Mortgage (or Standard Mortgage) is in the terms and conditions. Basically, banks and lenders are able to charge a higher interest rate with a collateral mortgage compared to a conventional mortgage. With a conventional mortgage charge, only the amount of the loan is registered against the property. With a collateral charge, a higher amount than the loan can be registered against the property.

Another type of collateral charge is a vehicle collateral loan. Collateral charges in car loans are a quick way to get a loan that is short term but they have increased interest rates. With this type of loan, you should proceed with caution as the downside is that if payments are not made to the loan then the lender can and will seize your car legally.

Kept Simple

A Collateral Charge mortgage definition is that you are able to borrow against your mortgage without having to refinance. However, you are unable to change lenders without having to pay legal fees. This means that you are locked into your mortgage term for the entire time of your contract without being able to leverage other bank interest rates and changing to another lender without incurring huge fees.

How Does Apply to you

If you purchase a home valued at $350,000. After you make a $50,000 down payment, you would need a $300,000 mortgage loan. Under a collateral mortgage loan, the maximum amount that can be registered is 125% or $437,500.

If the property value on your home goes up to $400,000 then you could potentially borrow up to 80% of the new appraised value minus what is still owed on the mortgage without having to refinance the entire mortgage. 

However, should interest rates lower and another lender is offering incentives to switch your mortgage to them, you would not have the freedom to do so. You would be charged large legal and processing fees as well as the possibility of a huge early termination fee should you want to switch lenders before the end of your current mortgage term.

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