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Everything You Need to Know About Collateral Charge Mortgages

calendarSeptember 20, 2019

peopleThe Mortgage Advisors

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Do you know the difference between a standard charge mortgage and a collateral charge mortgage? Find out everything you need to know about collateral charge mortgages and how they can be beneficial to home buyers in this article below.

What Is A Collateral Charge Mortgage?

A collateral mortgage is considered a re-advanceable mortgage product where a lender can loan you more money without the need to refinance your mortgage. To do this, the lender simply registers your home for a higher amount than what is needed so that you can borrow money from your home equity at any time. So, in the event that you want to increase your mortgage amount, secure other loans, or use a home equity line of credit (HELOC), you could do this with a collateral charge mortgage. 

How Does It Work?

Let’s say you purchase a home with a price tag of $500,000 with a mortgage of $400,000. If the maximum amount the lender will register you is 125% of your home value, that leaves you with $500,000.  If the value of your property rises to $550,000, you could borrow up to 80% of that new appraised value minus what you still currently owe the lender. If the amount you owe is $300,000, you would be left with $140,000 of available equity to take out without having to refinance your mortgage. 

How Is It Different from A Standard Charge Mortgage?

A standard charge only secures the actual amount of the mortgage in question and does not secure any other loan products. This requires you to re-qualify and pay any additional fees, such as registration and discharge fees. However, with a standard charge, homeowners can transfer their mortgage, whereas a collateral charge can only be registered or discharged, not transferred from your lender. 

What Are the Pros?

Collateral mortgages offer flexibility to those who want to tap into their home equity to pay for renovations, home improvements, or their children’s education in the future. This provides owners with immediate access to their equity without having to restructure their existing mortgage or take on more expensive loans. A collateral charge mortgage also avoids expensive refinancing costs if owners want to change any aspect of their mortgages such as the amortization period or loan amount.

What Are the Cons?

For one, no matter how much the value of your property goes up, you can only access what is registered under your collateral mortgage. Also, if you want to switch to a new lender or renew your mortgage, you may need to pay legal fees, although many lenders now offer programs for collateral transfers.  A collateral mortgage can also make it seem as if you have more debt than you actually do. This can become problematic if you need to secure secondary financing or wish to take out a new loan. It’s important to note that there are ways to work around some of these issues, which is why it’s crucial to talk to a mortgage advisor who can help you set up a collateral mortgage that works in your favour. To find out how you can get a collateral loan that benefits you and your family, contact us at the Mortgage Advisors. Our expert team will find you the best mortgage product for your needs.
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