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What if part or all of the money you have paid toward your mortgage is handed back to you as a line of credit?
I am sure you will have many projects to complete – buy an investment property, renovate the house, pay your medical bills, pay your children’s tuition, and more.
These are what a collateral mortgage is meant for. This form of mortgage allows you to redraw your mortgage in a line of credit format.
This guide looks into collateral mortgages, why you should consider them, what you should look out for, and how they generally work.
A collateral mortgage is a form of a readvanceable mortgage.
It is a type of mortgage that allows you to re-borrow without refinancing your mortgage. You can re-borrow the amount you’ve paid to your mortgage or the increased value of your property as its value rises over time without having to refinance your mortgage.
The lien of a collateral mortgage is registered as a collateral charge. A collateral charge is a way of registering a loan against your property.
By registering the mortgage as a collateral charge, the lender can register the mortgage as a revolving loan, like a personal line of credit, and at a value higher than the mortgage amount provided to you.
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There are two ways a lender can register a mortgage lien on your property. The first is a Standard Charge, and the other is a Collateral Charge.
With a standard charge, the lender registers the mortgage lien on your property for the same amount as the loan amount offered.
Say your mortgage amount is $350,000. The lien on your property will be registered for $350,000.
On the other hand, a collateral charge allows the lender to register the mortgage lien up to 125% of the house value. With the example above, for a $450,000 house price, the bank will register $562,500 as the mortgage loan even though you are only offered $350,000 on the day of closing.
Standard Charge mortgages are
Collateral charge mortgage registration
Most often, fixed-rate mortgages
They can be either fixed-rate mortgages or variable-rate mortgages
Registered with the Land Title Registry or Register Office (as referred in your province)
Registered under the Personal Property Security Act (PPSA)
These mortgages can be switched, transferred, and discharged
It can only be discharged, not transferred.
A typical mortgage’s regular payment structure comprises a principal payment and an interest payment. The principal portion of the payment goes to pay down the mortgage, and the interest portion pays off the interest expense of the mortgage.
In a collateral mortgage, the principal payment goes instead to increase the HELOC portion of the mortgage. The money paid becomes available for withdrawal instantly as a Line of Credit.
In a nutshell, you build up the HELOC portion of the mortgage as you pay down the principal portion of the standard mortgage.
So if you are required to make a regular mortgage payment of $1,500 every month, of which $800 goes to pay down the mortgage and $700 goes to pay off the interest portion. The $800 will instantly be available for you to withdraw. Your HELOC available credit will increase by $800.
You do not have to apply or get qualified to access this money. That’s the beauty of a readvanceable mortgage.
This shift will continue until the HELOC portion makes up 65% of the property value.
The secret is how a collateral mortgage is registered. Unlike a standard mortgage, a collateral mortgage is registered like an unsecured credit – a personal Line of Credit or Credit Card. It is not registered with the Land Registry but instead registered as a security interest in your property under the Personal Property Security Act (PPSA).
This allows your lender to provide an umbrella type of loan in the form of a mortgage. The lender can register all your other credit products (auto loan, credit card, and personal line of credit) under your property claim. This means your house is indirectly used as security for these “supposed to” unsecured credits.
The lender can foreclose on your house for missing your credit card payment. Sure, that is weird. Even though it rarely happens. However, the collateral charge gives that authority to the lender to trigger a foreclosure if you missed payment on any under the collateral mortgage umbrella.
Allow the lender to register all other debts you have with it under the collateral or mortgage umbrella.
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The main advantage of a collateral mortgage is the ease at which you get access to money. A collateral charge mortgage makes borrowing more money with the current lender easy and affordable. A standard mortgage will require that you refinance the mortgage if you want to borrow more money.
Also, it is cheaper to access money in the future since you do not necessarily need to refinance the mortgage to access money with the same lender. Thus, you will save on legal fees, origination fees, and other mortgage closing costs by not going through the mortgage refinance process.
Because your mortgage loan is registered at an amount above what you borrowed, your lender can quickly increase your loan without requiring you to go through the whole qualification, application, and legal processes. You could request an additional $50,000 to finance a major home renovation.
A collateral charge makes moving your mortgage to a new lender difficult. The new lender may not accept the ‘terms and conditions of your collateral mortgage charge.
The mortgage agreement is not registered with the land registry, as do standard mortgage charges. You will need a real estate lawyer to register the mortgage charge with a land registry to transfer the mortgage. That registration process can cost you up to $1000 in legal fees.
A collateral mortgage agreement allows lenders to register all your debts with them (old and new) against the property. Your credit cards, auto loans, and other standard secured debts registered against your home increase your risk of foreclosure. This means you risk loosening your home if you cannot make the payments of these additional credits.
Collateral charges make registering a second lien like a second mortgage, home equity loan, or a HELOC on your property difficult. The collateral charged is registered for up to 125% of your property value, leaving no room to register other security.
To summarize, collateral charge mortgages can be a great tool if used properly. It allows you to combine different loan products under one umbrella. Also, providing you with an opportunity to access the equity in your property in the future without necessarily refinancing your mortgage, thus, saving you possible penalties and origination fees.
And finally, collateral charge mortgages are not registered with the Land Registry, as do standard mortgages. Still, they are registered under the Personal Property Security Act of Canada, allowing the lender to bring all other unsecured credits you have with them under the collateral charge umbrella.