Back to Blog
21 Jun

Collateral Mortgages – What you should know before entering one

General

Posted by: Jeff Dickson

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

office.

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.