Collateral vs Standard Charge Mortgage

Collateral vs Standard Charge Mortgage:

and How It Can Affect You

CongratulationsCollateral v. Standard Charge Mortgage, you purchased a home.  Now it’s time to obtain a mortgage.  Many people only consider the interest rate and amortization period without really considering the type of mortgage they are signing up for.

As many lenders are moving to collateral charge mortgages it’s becoming increasingly important to understand the differences between a collateral or standard charge mortgage. Both types of mortgages have advantages and disadvantages; understanding which one right for you depends on your down payment, future needs, and long-term goals.

Collateral vs Standard Charge Mortgage:

With a standard charge mortgage, you agree to the terms of the mortgage:  the amount you are borrowing, the interest rate and the term.  For example, if your home is valued at $500,000 and you put $100,000 down, then your mortgage is $400,000.  The mortgage is registered at $400,000.00.  If for example you wanted a credit line or to refinance, you would have to reapply.

On the other hand, a collateral mortgage registers the loan on your property between 100%-125% – regardless of the initial amount borrowed from the lender.  For example: if your home is valued at $500,000, and you borrowed $400,000, a mortgage could be registered against your home for up to $625,000.  The thinking behind this is that if you want to borrow money in the future, there is an understood global limit.  The advantage to the borrower is that there will be no additional legal fees to refinance.  The reality is that the lender ensures that their customers do not move their mortgage business elsewhere.

Before making this decision, consider the following: 

If you want to switch to another lender, you will likely be forced to pay legal and registration fees.  Further, many banks won’t allow transfers because of the other loans tied to the collateral charge.  This makes it harder to leave the lender because all of your debt under this one agreement.  This significantly impacts your negotiating power at maturity.  If the lender knows you can’t move, there is no incentive to offer the best rates.

What if a few years down the road an investment opportunity comes along, and you need a second mortgage.  Because the mortgage is registered for the full value or more of the property value at the time of the mortgage, there is no ability to put a second mortgage on title as there may not be any room to borrow.   The only option at this point is to determine what the penalty would be to pay out the mortgage and often, the amount is too high.

So which one is right for you?

If you feel that there is a very good chance you will refinance to consolidate debt or to extract equity for a renovation or to invest, then a collateral charge mortgage may be a wise decision.

If you don’t believe that you’ll need to refinance or extract equity, then a regular standard charge mortgage will suit your needs, and will give you the ability to move to another lender at renewal should you want to without incurring legal fees. In other words, it’s easier for you to keep your options open. If need to borrow more with a standard charge mortgage, you have the option of a second mortgage or line of credit.

Contact your local real estate legal professional at Frost Law, Professional Corporation to discuss which option is right for you.

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