Collateral charge mortgages are increasing in popularity among lenders, which has increased confusion for some homebuyers on what type of product they’re being offered. There are a few key differences between collateral charge and standard-charge mortgages, each with their own benefits and drawbacks.
What is a Collateral Charge Mortgage?
A collateral charge mortgage serves the purpose of ensuring additional funds are available through the equity in your home, without having to pay the additional administrative and legal fees that are typically involved in a refinance. This gives you the ability to tie additional loans into your mortgage which generally offers lower interest rates than other loan sources, such as credit cards, car loans and personal lines of credit.
A standard-charge mortgage, on the other hand, registers the exact amount of your mortgage. Any additional types of funding are required to be registered separately, and a refinance would involve dissolving the current mortgage and replacing it with a new one.
Some lenders, such as TD, only offer collateral charge mortgages while others offer both collateral and standard-charge.
How much will my collateral charge be registered for?
This is dependent on your lender – some lenders offer up to 125 percent of the appraised value of your home. This is so that if the value of your home increases in the future, it allows you to gain access to the increased value without refinancing. The additional amount above and beyond your mortgage amount is decided upon between you and your lender; it is wise to consult with your broker to understand the implications before moving forward.
It is important to note that accessing additional funds through your collateral-charge mortgage does still involve a qualification process; these funds are not automatically made available to you.
What should I watch out for?
Renewal Costs
If you are looking to switch lenders upon renewal, there can sometimes be a cost associated that you would not incur with a standard-charge mortgage. However, some lenders do offer ‘no-cost switch’ products for eligible borrowers. Additionally, as your renewal date approaches, your lender may also offer you an interest rate that is less competitive than what you are seeing on the current market.
It’s wise to consult with your broker upon renewal, as they are able to negotiate on your behalf and are trained to navigate all types of mortgage products.
