What is a Collateral Mortgage?

A collateral mortgage, also known as a collateral charge mortgage, differs from a standard mortgage in that it is typically registered for an amount higher than what the borrower initially receives. While this type of mortgage has been around for years, it was mostly used for secured lines of credit or a HELOC. Unlike a standard mortgage, which registers a charge on the title for the exact amount borrowed, a collateral mortgage allows for flexibility in future borrowing, making it easier to borrow money as needed.

For instance, TD mortgage rates made a major shift in their mortgage policies on October 18, 2010, by switching to collateral mortgages. Instead of registering just the loan amount, they started registering a charge for 125% of the property’s value. However, borrowers could choose to register either at 125% or at the actual borrowed amount.

How a Collateral Charge Mortgage Works

A collateral mortgage makes it easier for homeowners to access additional funds as they pay down their mortgage or as their property value increases. Collateral mortgages are registered directly with the financial institution lending the money, impacting the flexibility and limitations of accessing home equity. Since the mortgage is already registered at a higher amount than the initial loan, the lender can advance more funds without requiring the borrower to go through the process of discharging the existing mortgage and registering a new one.

Additionally, the interest rate can be adjusted within the limits of the registered charge, meaning that a lender could increase the interest rate without creating a new agreement. The mortgage loan amount can be increased over time based on the property’s value, allowing borrowers to access funds without the need for refinancing.

However, there’s a major downside: borrowers cannot take out a second mortgage from another lender. Even if the outstanding balance on the first mortgage is low, the fact that the collateral mortgage is registered at a high percentage of the home’s value means there’s no room for another lender to secure a second loan against the property.

Another important consideration is that collateral mortgages are not easily transferable between different banks. Unlike a standard mortgage, which can often be transferred at renewal with minimal cost, a collateral mortgage requires full discharge and re-registration, resulting in higher legal fees, and a possible mortgage prepayment penalties.

Key Features of Collateral Mortgages

Collateral mortgages come with several distinctive features that set them apart from standard charge mortgages. Here are some of the most important ones:

• Re-advanceable: One of the standout features of collateral mortgages is their re-advanceable nature. This means that as your property value increases, your lender can lend you more money without the need for a new mortgage agreement. This can be particularly beneficial if you need additional funds for renovations or other a construction mortgage.
• Collateral charge: Unlike standard mortgages, collateral mortgages are registered with a collateral charge. This is similar to how a home equity line of credit (HELOC) is registered, allowing for more flexibility in borrowing.
• No refinancing required: With a collateral mortgage, you can borrow more money without the need to refinance your mortgage. This can save you time and hassle, as you won’t need to go through the process of discharging your existing mortgage and registering a new one.
• Easier future borrowing: Collateral mortgages make it easier and cheaper to borrow more money from your current lender in the future. Since the mortgage is already registered at a higher amount, you can access additional funds without incurring significant costs.
• Avoids legal fees: One of the major advantages of collateral mortgages is that they help you avoid the legal fees associated with refinancing. Since you don’t need to discharge and re-register your mortgage, you can save on these costs.

How Collateral Mortgages Differ from Standard Charge Mortgages

Collateral mortgages and standard charge mortgages have several key differences. Understanding these differences can help you make an informed decision about which type of mortgage is right for you:

• Registration: A collateral mortgage is registered with a collateral charge, while a standard charge mortgage is registered with a standard charge. This difference in registration affects how additional borrowing and refinancing are handled.
• Re-advanceability: Collateral mortgages are re-advanceable, meaning you can borrow more money as your property value increases without needing a new mortgage agreement. In contrast, standard charge mortgages are not re-advanceable, so any additional borrowing typically requires refinancing.
• Flexibility: Collateral mortgages offer more flexibility in terms of borrowing and refinancing. You can access additional funds more easily and without the need for a new mortgage agreement. Standard charge mortgages, on the other hand, are more rigid and may require refinancing for additional borrowing.
• Legal fees: Collateral mortgages help you avoid the legal fees associated with refinancing, as you don’t need to discharge and re-register your mortgage. Standard charge mortgages may require you to pay legal fees if you need to refinance to access additional funds.

Example Scenario of Collateral Mortgages

Zara is buying her first home for $400,000 and needs a $380,000 mortgage, meaning the loan-to-value (LTV) is 95%. Most lenders offer collateral mortgages, and it is important for borrowers to understand this option when securing a mortgage. She secures a mortgage from North York Bank at an interest rate of 3%, but instead of registering the mortgage at $380,000, the bank registers it for $500,000 (125% of the home’s value) at prime plus 10%

A few years later, Zara’s home appreciates to $500,000, and she has paid down her mortgage to $341,898. She decides to renovate her basement and needs an additional $20,000. Since she has a collateral mortgage, North York Bank can simply increase her loan balance to $361,898 without having to register a new mortgage.

However, if Zara wanted to get a second mortgage from a different lender for the renovation, she wouldn’t be able tobecause her entire property is already used as collateral for North York Bank. Zara’s bank, like most lenders, offers collateral mortgages, which impacts her ability to get a second mortgage from another lender.

Pros & Cons of Collateral Mortgages

Main Benefit:

• Easier refinancing – If the borrower wants to borrow more money in the future, the lender can do so without the hassle of discharging and re-registering the mortgage. However, unlike a conventional mortgage, refinancing a collateral mortgage can be more complex and costly.

Main Disadvantages:

• Limited additional financing options – Since the entire property is used as collateral, the borrower cannot get a second mortgage from another lender.
• Higher costs for switching lenders – Transferring a collateral mortgage to another lender at the end of the term is more expensive because the existing mortgage must be fully discharged and a new one registered. Consulting a mortgage broker can help borrowers understand the implications of choosing a collateral mortgage over a conventional mortgage.
• Outstanding mortgage consideration – The outstanding mortgage amount must be considered when calculating available equity for additional borrowing.
• Specific financial products – Specific financial products, like the ‘All-in-One’ service from National Bank, offer flexible credit options for managing a mortgage.

Switching Lenders with a Collateral Mortgage

Switching lenders with a collateral mortgage can be more complex than with a standard charge mortgage. Here are some important considerations:

• Discharging the mortgage: To switch mortgage lenders, you must first discharge the mortgage from your current lender. This process can be more involved than with a standard charge mortgage.
• Registering with the new lender: After discharging the mortgage, you will need to register the mortgage with your new lender. This involves additional paperwork and can incur costs.
• Legal fees: Switching lenders with a collateral mortgage may require you to pay legal fees. These fees can add up, making the process more expensive than switching a standard charge mortgage.
• Credit score: When switching lenders, your credit score will be a crucial factor. You may need a higher credit score to qualify for a collateral mortgage with a new lender, so it’s important to ensure your credit is in good shape before making the switch.

By understanding these factors, you can better navigate the complexities of switching lenders with a collateral mortgage and make an informed decision that best suits your financial needs.