Collateral Charge Mortgages
- Re-advanceable loans
- Access to additional funds without the use of lawyer
- Lender can change interest rate at any time (usually only when in default)
- Unsecured debt can be interconnected with mortgage (they can use your mortgage payment to pay oﬀ other debts if you miss a payment which puts you in default on your mortgage!)
- Mortgage is NON transferrable
- Highly impacts your renewal options
- Register mortgage for MORE than you borrow (up to 125%)
What is a collateral charge?
A collateral charge is basically a diﬀerent method of registering a mortgage or loan against real property. Collateral charges used to only be used for secured lines of credit, but are now becoming quite popular with many major fnancial institutions for their regular mortgage products. It diﬀers from a “standard mortgage” in signifcant ways that aﬀect your ﬂexibility with the contract/bank.
Terms in a loan agreement
Regular Mortgages put all of the key terms in a document that’s registered with the provincial land/registry ofce – Standard Mortgage Charge. A Collateral Mortgage, however puts key terms in a loan agreement which is NOT registered the same way. This collateral loan agreement may contain terms such as:
- The lender has the ability to change the interest rate at any time. Although this usually only occurs if in default, it can occur on certain products such as lines of credit, overdraf facilities etc.
- You can increase your loan amount without reregistration on title which means no legal fees
- Unsecured debt such as credit cards, overdraf, loans etc. can become interconnected
- The lender can use your mortgage payment to pay down other debts you have with that lender (if you default on those debts)
- For example, if you have a visa and are late in making the payment with the same bank you have the mortgage with, they can transfer your mortgage payment to the credit care instead, without your permission which immediately puts your mortgage in default.
- They can now contact you and ask for you to pay back the entire mortgage immediately or foreclosure proceedings will commence!
- If you are late or default on paying home insurance, property taxes, or condo fees, just like point #3, the collateral charge can be used to pay them oﬀ!
- On Demand: You will be signing a document at the lawyers that confrms the mortgage is “on demand”. The lender can ask to be repaid at any time with no recourse to the lender. This usually only happens in default, but if you remember #3 and #4, this could mean default on other debts, NOT just your mortgage
Collateral charges have their place
- Re-Advanceable multi part mortgages
- Secured Lines of Credit
- Protect the equity in the property for the borrowers and/or family
- Protect against identity thef
- Access to more funds without the need for a lawyer
What a Collateral Charge does, and limits
- Register more than you borrow
- Lender may register a higher amount on title than is actually borrowed at the time mortgage is set up- up to 125% of the value
- This results in the Lender protecting all of the current and future equity in your property and disallow any secondary fnancing from another lender
- Can re borrow, but with be limited to ONLY the options provided by the existing lender
- If moving from one bank to another, will incur legal fees and potentially a penalty as well
- Unlike a Standard Charge, you can borrow more money afer the mortgage is funded without the need to pay a lawyer
- This is still subject to requalifying to get access to more funds
- NON Transferable
- It cannot be transferred or switched to a new lender line a regular mortgage without incurring legal fees
- This impacts your renewal options
- At renewal, if your existing lender is not being competitive on rate, you will need to hire a lawyer and “refnance” to move to another bank, even though you may not be adding any more money
While collateral charge mortgages have their place in mortgage lending, the majority of people do not beneft from this type of registration. Most people are better suited for a standard charge mortgage contract. Use an expert to ensure that you are protected against hidden cost.