Mortgage Blog

What is a Collateral Charge Mortgage?

July 17, 2018 | Posted by: Brandi Pierik and Matthew Pierik - Red Deer and Calgary Mortgage Brokers

What’s a Collateral Charge Mortgage?

With several lenders today offering collateral charge mortgages, it’s important to understand the differences between a collateral and a standard charge mortgage before signing your mortgage commitment.

The main difference is that a collateral charge registers the mortgage for more money than you require at closing. For instance, it’s up to 125% of the value of the home at closing with some banks or 100% through many credit unions, instead of the amount you actually require to close your transaction, which is the case with a standard charge mortgage.

The major downside to a collateral mortgage becomes evident at your mortgage renewal date. If you wish to keep your options open at maturity and ensure you have negotiating power with your lender, this isn’t the best product feature because collateral charge mortgages are difficult to transfer from one lender to another.

In other words, if you want to change lenders in order to seek a better product or rate in the future, you have to start from the beginning and pay new legal fees, which typically range between $500 and $1,000.

With a standard charge mortgage, however, in most cases, the new lender will cover the charges under a straight switch in order to earn your business.

In addition, with a collateral charge, it could be difficult to obtain a second mortgage or a home equity line of credit – or HELOC – unless your home significantly appreciates in value.

Keeping your options open

Lenders offering collateral charge mortgages promote the benefit that it makes it easier and more cost-effective to tap into your equity for such things as debt consolidation, renovations, or property investment. There’s no need to visit a lawyer and pay legal fees – the money is available as your mortgage is paid down. Yet, if you read the fine print, you may still have to re-qualify at renewal.

A standard charge mortgage offers the flexibility to move to another lender at renewal should you wish without incurring legal fees, and many borrowers find it more beneficial to keep their options open. This means you have just as much negotiating power through your mortgage broker at renewal time as you did when you secured your original mortgage.

If you need to borrow more with a standard charge mortgage, you have the option of a second mortgage or a HELOC, which also enables you to access equity as your mortgage balance is paid down.

Navigating through the mortgage process alone can be tricky. Working with a Red Deer mortgage broker who has access to multiple lenders and your best interests top of mind will help ensure you always receive the product and mortgage rate catered to your specific needs.

Have questions about collateral versus standard charge mortgages or your Red Deer mortgage options in general? Answers are just a phone call or email away!

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