Collateral Mortgage Trap

This is the type of advice that you will received when working with a mortgage broker. Not all mortgages are the same. From the very low-rate “no-frills” mortgage offering the lowest possible rate – with the least future flexibility TO the high-rate “fully-open” mortgage – providing the most flexibility, and many many other types of mortgages in between.

One aspect of a mortgage that dwells within the domain of the lawyers’ office is the the type of charge registered against the title of the property.

There are two types of charges lenders use to document the security for a mortgage loan: conventional charge and collateral charge.

Conventional Charge: the specific details of the mortgage loan (interest rate, amortization period, term, payments) are included in the charge registered on title to the property. The balance ($$) of the charge will decrease with each scheduled payment.
The conventional charge only secures the mortgage loan.

Collateral Charge: the specific details of the mortgage loan are NOT included in the charge registered on title to the property. A separate credit agreement contains the specific agreement to the mortgage loan.
It is also possible for the lender to put a charge of 125% of the value of the property.
The balance ($$) of the charge will not decrease.
The collateral charge may secure other debt besides the mortgage loan. (If you have equity in your home and you have defaulted on another loan or credit card, the lender can increase your collateral mortgage and pay out this other debt).

Transferring your mortgage at Renewal time

Conventional Charge:
Although each lender has their own rules for accepting transfers from another lender, they will only do so if they feel comfortable with the existing charge. Since a Conventional Charge key elements are fairly consistently amongst lenders, transfers are usually acceptable.
Also since the legal costs involved to transfer are minimal (eg there is no discharge, and new charge applied to the title – only a change), the new lender is usually willing to pick-up those costs for your business.

Collateral Charge:
To transfer the existing collateral charge from one lender to another is very complicated – it is easier to discharge, and create a new charge for the new lender. This cost, however, is comparable to the cost of a refinancing – which is usually picked up by the borrower.

Borrowing Additional Funds

Applicable to Both

  • You will need to apply and be approved by the lender for the increased amount based on the current credit criteria of the lender, your ability to repay the mortgage loan and verification that your home’s value supports the mortgage loan request.
  • If you want to borrow additional funds from a different lender, the new lender may have to register new security by registering a new additional charge (a second mortgage) or by discharging the existing charge and registering a new charge. In either case, there may be costs such as legal, administrative and registration costs. Talk to us.

Differences

From the same lender

  • For a conventional charge mortgage, if you want to increase the principal amount of your mortgage loan, the lender will likely need to discharge the existing charge and register a new charge for the higher amount. If you want to add a second mortgage loan, your lender will need to register a new charge against the home. There may be costs such as legal, administrative and registration costs. Talk to us.
  • For a collateral charge mortgage, your lender may not need to re-register the charge when increasing the principal amount of your mortgage loan or taking out another loan secured by your home, provided that you don’t exceed the registered amount on the existing charge. There will be no registration or discharge costs and any legal costs may be lower.

From a different lender (while keeping the existing charge and mortgage loan)

  • If you have a conventional charge mortgage and you want to borrow additional funds from a new lender using your home as security the new lender may agree to register a second charge against the home. There may be costs such as legal, administrative and registration costs. Talk to us.
  • If you have a collateral charge mortgage that is registered for more than your loan amount and you want to borrow additional funds from a new lender using your home as security, your new lender may require information about the outstanding balance or may ask your existing lender to take certain actions to allow room for the new charge. There may be costs such as legal, administrative and registration costs. Talk to your lender.

Click here to take a look at a recent article that Ellen Roseman published in the Star