There has been more attention paid to collateral mortgage charges in recent years but most borrowers are still vague on the details and what impact it will have on them in the future.

A collateral charge is basically a different method of securing a mortgage or loan against your property. It differs from a standard (traditional) mortgage in some very important ways:

  1. Unlike a standard mortgage, a collateral charge is re-advanceable — That means the lender can lend you more money after closing without you needing to refinance and pay a lawyer.
  2. A collateral charge is non-transferable — It cannot be assigned (switched) to a new lender like a regular mortgage.

In addition, regular mortgages put all of their key terms in a document that’s registered with your provincial land title/registry office. A collateral mortgage, however, puts key terms in a loan agreement which is not registered in the same way.

That collateral loan agreement may therefore contain terms that other lenders are not aware of, or might find objectionable. For that and other reasons, lenders don’t accept transfers from borrowers with collateral charges. Instead, the borrower must refinance in order to switch lenders, and that entails legal costs.

Collateral charges also allow lenders to do things like change your interest rate, increase your loan amount, and use your mortgage payment to pay down other debts you have with that lender (if you default on those debts).

When is a collateral mortgage charge good for a borrower? When a property has a substantial amount of equity in it (20+% equity), then the borrower will be able to obtain a Home Equity Line of Credit without refinancing which would include legal fees.

Remember too that there is no guarantee, even with a collateral mortgage charge, that the lender will re-advance funds. The lender always needs to approve the additional funds, a big caveat.

When is a collateral mortgage charge not good for a borrower? If you have a collateral mortgage charge and your mortgage comes up for renewal, if your current lender is not offering you the best rates, you cannot switch to a new lender without incurring legal fees (~$800-$1,000).

In a CBC report from 2013, a TD Bank representative was caught on a hidden camera saying: “This could be considered a con for clients who want flexibility to have the choice of transferring out (to another lender).” Admitting that it’s a play to retain clients without clearly explaining this to borrowers upfront.

The good news is that there are now a few lenders that have created products specifically for those clients stuck in collateral charge mortgages.

Additional drawbacks, according to CanadianMortgageTrends.com, over and above the cost of switching, are:

  1. Since they’re often registered for more than the mortgage amount, collateral charges can sometimes prevent you from obtaining a second mortgage or a secured line of credit elsewhere (unless you pay any penalties and fees required to leave the collateral mortgage lender, or unless that first lender reduces the mortgage amount it has registered and permits secondary financing).
  2. Title insurance premiums can sometimes be higher for a collateral mortgage than for a regular mortgage.
  3. In some cases, defaulting on another debt owed to a collateral mortgage lender can put your house at risk. That’s because that lender can theoretically seize your home equity if you don’t pay that other debt (this is called “offsetting” in legal parlance).

The last point is the most important of all!

So make sure you ask a lender if the charge on title will be registered as a collateral charge and if there is an option to do a standard registration.

This is just some of the added value you will get from using a Mortgage Broker – we take time to educate our clients about the various lender products to ensure that we are choosing one the best fits their goals for the term.

Talk to us first!