Collateral Mortgages: How a Collateral Charge Works

A collateral mortgage, also called a collateral charge mortgage, is a mortgage your lender can register against your home for more than you borrow. That extra room lets the lender lend you more later without setting up a new mortgage. This guide covers how a collateral charge works, how it differs from a standard charge, its pros and cons, and what it means when your mortgage comes up for renewal.

What Is a Collateral Mortgage?

When you take out a mortgage, your lender registers a charge against your property. There are two kinds:

• Standard charge: registered for the amount of your mortgage, and secures only the mortgage. It doesn’t secure other loans you have with the lender, such as a line of credit.
• Collateral charge: can be registered for more than the amount of your mortgage, and can secure several loans with the same lender, such as your mortgage and a line of credit.

Some lenders register a collateral charge for the mortgage amount, some for the home’s value and some for more than the home is worth. A collateral mortgage can be a regular mortgage on its own, or it can have a home equity line of credit (HELOC) attached so you can draw on your equity when you need it.

How Does a Collateral Mortgage Work?

Because the charge is registered for more than you owe, your lender can lend you more as you pay down your mortgage or as your home’s value rises, up to the registered amount. You avoid the fees to discharge your mortgage and register a new one, although you still need to re-qualify with your lender each time you borrow more.

For example, say you buy a $500,000 home with a $400,000 mortgage, and your lender registers a collateral charge for $500,000. A few years later, your home appraises at $550,000 and you owe $300,000. Most lenders let you borrow up to 80% of your home’s appraised value, minus what you owe. Since 80% of $550,000 is $440,000, you could access up to $140,000 without refinancing, as long as you qualify.

Pros of a Collateral Mortgage

• You can borrow more later, up to the registered amount, without paying to discharge your mortgage and register a new one.
• Your mortgage and a line of credit can sit under one charge, which gives you quick access to your equity for renovations, education costs or other large expenses.
• You only make payments, including interest, on the money you borrow.

Cons of a Collateral Mortgage

• Switching lenders can cost more. Moving a collateral mortgage to another lender can mean paying to remove the charge and register a new one. See the renewal section below.
• Your secured loans are tied together. To remove the charge, you have to repay or transfer every loan it secures, such as a line of credit or a car loan.
• It can be harder to borrow elsewhere. If the charge is registered for the full value of your home or more, it can look as if you owe more than you do. That can make a second mortgage or other new loan from another lender hard to get, even when you have equity.
• Your borrowing is capped. You can only access what is registered, no matter how much your home’s value goes up.

How a Collateral Charge Affects Switching Lenders at Renewal

When your term ends, you can switch your mortgage to another lender for a loan of the same amount. If your mortgage is registered with a collateral charge, plan for these extra steps:

• Fees to remove and register the charge. You may have to pay fees to remove the charge from your current mortgage and register the new one.
• Every secured loan has to be dealt with. You must repay in full, or transfer to the new lender, all the loans the charge secures, including lines of credit and car loans.
• Approval from the new lender. The new lender has to approve your application and may use different criteria than your current lender.
• Other switching costs. Ask about appraisal and administration fees, and whether the new lender will cover some or all of your costs to switch.

Not sure how your mortgage is registered? Ask your lender, lawyer or notary, and check a few months before your renewal date so you have time to weigh your options. If you also want to borrow more, compare the cost of refinancing your mortgage.

Is a Collateral Mortgage Right for You?

A collateral mortgage can suit you if you expect to borrow against your home again and plan to stay with your lender. If you want to keep switching lenders at renewal simple, a standard charge may be the better fit.

Some lenders only offer collateral mortgages, so it’s worth knowing how your mortgage will be registered before you sign. Working with a mortgage broker gives you a choice of over 30 lenders, so you can choose the mortgage that fits your needs. For advice on whether a collateral mortgage is right for you, contact The Mortgage Advisors.