The pros and cons of a collateral charge mortgage

For homeowners looking to squeeze some more financing out of their mortgage without having to refinance, a collateral mortgage — sometimes referred to as a retail collateral mortgage — can help. 

A collateral mortgage can provide additional peace of mind when finances are tight, but there are risks to consider.

What is a collateral mortgage?

A collateral mortgage is a type of readvanceable mortgage, which means it enables you to borrow more money than the actual loan amount as your home’s value rises or as you pay down your collateral mortgage loan — without having to refinance. This extra amount of money is extended to you via a home equity line of credit (HELOC).

Usually when lenders register a mortgage, they do so via a standard mortgage charge. This means they will only register the mortgage for the amount you require at closing.

By definition, a collateral mortgage is any mortgage registered using a collateral charge — meaning the equity within your home is used as the collateral against your line of credit. In Canada, a collateral charge mortgage simply refers to the specific method of securing a mortgage or loan against your property.

Mortgages registered with a collateral charge can be registered for more money than you actually require at closing — up to 125% of the appraised value of your home, as opposed to the amount you need to close your transaction. Some lenders will let you dictate the amount you want the charge to be registered for. With a standard charge mortgage, only the amount required to close the transaction is registered.

Conventional vs collateral mortgage

With a collateral mortgage loan in Canada, you can borrow more money as you pay down your mortgage or as the value of your home rises, whereas with a conventional mortgage, you would need to refinance if you wanted to borrow more money. 

Refinancing comes with hefty fees, which is why homebuyers may opt for a collateral mortgage when shopping for real estate. People also prefer the convenience of being able to take extra financing only if and when they need it. 

An important distinction between a conventional and a collateral mortgage in Canada is that a collateral mortgage is not registered at your municipal registry office. This means that it cannot be discharged or transferred to a different lender. If you want to refinance with another lender, you’d be on the hook for the legal fees to discharge your collateral mortgage and register it somewhere else. 

Collateral mortgage pros and cons

Before signing on the dotted line of any mortgage agreement, including a collateral assignment of mortgage, it’s important to weigh the pros and cons.

The major benefit of a collateral mortgage is that it allows you the option of accessing money from your home’s equity without refinancing or legal costs. It also lets you access more money the more your home’s value rises over time. 

The negative aspects of a collateral mortgage are that it can be more difficult, not to mention costly, to switch lenders. You also need to be mindful of how much debt you incur with your HELOC because if you fail to meet the additional payments, you could be putting yourself at a greater risk of losing your home. In addition, it could be difficult to obtain a second mortgage or a HELOC unless your home value significantly rises. 

Securing a collateral based mortgage

If you’re looking to secure the best collateral mortgage for your needs, speak with a mortgage broker or a lender that offers this type of product. Some lenders exclusively offer collateral mortgages, so be sure to know what type you’re signing up for.

While you’re getting your questions about collateral mortgages answered, compare rates online from different lenders. Collateral mortgage rates will vary between lenders, so it’s important to ensure you’re getting the best deal possible.