Most people are unaware that there are two different types of mortgages available to Canadians, the
more common “Standard Charge” mortgage and a “Collateral Charge” mortgage. Both types of
mortgages have their advantages but it is important to understand the difference between them.
The difference between the two mortgages is how the lender registers the charge with the land registry
With a standard charge mortgage the lender will register your specific mortgage details (principal
amount, interest rate, term, etc) and the standard charge is registered for the actual amount of the
mortgage. At maturity this registered charge is transferable to another lender with minimal expense.
With a collateral charge mortgage the lender will register a charge for a greater amount than your
original mortgage loan. This amount can be up to 125% of the value of the mortgaged property. What
this does is gives the lender and borrower the ability to secure future loans with the property without
having to register new charges. This collateral Charge is not transferable to another lender at the
maturity of the mortgage term.
The Good – The benefit of a collateral charge mortgage is that you may be able to refinance your
mortgage or borrow additional secured loans (line of credit or credit cards) in the future without having
to register a new charge against the property. This will save time and expense for the borrower. It is
important to note that the lender will still need to approve any additional loan based on the borrower’s
financial situation at the time.
The Bad – The main negative of a collateral charge mortgage is that it is not transferable to another
lending institution at maturity. If a borrower wants to change lenders at maturity for a better rate or
better mortgage features they will incur legal fees to discharge the maturing mortgage and register a
new mortgage with the new lender. These fees can range from $500 to $1000. For borrowers who
want to keep their options at maturity and maintain negotiating power this is not the best mortgage.
The Ugly - There are other potential disadvantages related to collateral charge mortgages due to their
structure that are important to understand.
As a homeowner you lose control of the equity in your home. Regardless of how much equity you have
in the house the charge registered against the property can be up to 125% of the value of the home. No
other lender will be willing to give you a 2 nd mortgage or a secured line of credit using your house as
collateral because the first lender controls all the equity. As long as the collateral mortgage is in place
all secured lending will have to be done with the first lender. And if that lender declines a request for
more money, which they have the right to do, you will have very few options.
All loans made under a collateral mortgage are interconnected and as a result may reduce your ability to
shop your mortgage around at maturity. If you have a mortgage, a line of credit and possibly a secured
credit card under one collateral charge mortgage, in order to move the mortgage portion you would
need to pay off all debts in order to move the original mortgage to a new lender.
Collateral charge mortgages do have advantages, but unfortunately most are for the lending institution.
It is important to be aware that a couple of the major banks now only offer collateral change mortgages.
As with any financial product make sure you understand the pros and cons of a collateral charge
mortgage before entering into one. And if you have questions seek the advice of a professional who is
looking out for your best interests.