There are two ways a lender can register a mortgage loan: they can use a mortgage charge or a collateral charge. With a mortgage charge, the lender will register your home with the land title or registry office in your municipality, and the mortgage can then be registered, transferred or discharged from your lender. A collateral charge, on the other hand, is registered under the Personal Property Security Act (PPSA) of Canada, and can only be registered or discharged (not transferred) from your lender. Keep reading to find out why and how this affects your mortgage.
Collateral mortgage make sense when you think you will need to borrow more money during the term of your mortgage.
What is a Collateral Mortgage?
A collateral mortgage is a readvanceable mortgage product, meaning that your lender can lend you more money as your property value increases without having to refinance your mortgage. To do so, the lender registers your home with a collateral charge similar to what they do for a home equity line of credit, and have the ability to do so for a higher amount than the mortgage loan amount you need.
By registering the home with a collateral charge, you can then borrow money from your home at any time, without having to refinance your mortgage. This makes future borrowing from your current mortgage lender easier and cheaper, as you would then be able to avoid the legal fees incurred by having to hire a real estate lawyer to help you through a refinance.
One important thing to consider about collateral mortgages, however, is that they cannot be transferred to another lender – not even at the end of your mortgage term. The reason it’s not transferrable is because the collateral loan agreement was not registered with your land title or registry office, so it may contain terms that other lenders don’t agree with. If you ever decided to switch lenders, you would then need to hire a real estate lawyer to help get you out of your collateral loan agreement.
What are the Pros of a Collateral Mortgage?
The benefits of getting a collateral mortgage include:
- The flexibility to borrow money from your home at any time,and
- The ability to avoid the legal costs associated with refinancing
What are the Cons of a Collateral Mortgage?
The downsides of a collateral mortgage include:
- The need to pay legal fees, if you switch to another lender, even if your mortgage is up for renewal.
- The fact that, on paper, it could look like you have more debt than you do (By having a larger amount registered, you may have a tough time securing secondary financing for other things)
Source: Rate Hub