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When you use your home as collateral for a mortgage, the lender registers a claim against your property, granting them the legal right to seize and sell it if you fail to meet your loan obligations. Lenders typically register this claim in one of two ways: as a standard charge or a collateral charge.
The way the claim is registered has significant implications for both you and the lender regarding what can and cannot be done with the property. Understanding the nuances of a collateral charge is essential to making an informed mortgage decision that suits your needs.
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A lender can register a mortgage lien on your property through a Standard Charge or a Collateral Charge.
With a Standard Charge, the lender registers a lien equal to the exact amount of your mortgage loan. For example, if your mortgage is $350,000, the lien on your property will also be registered for $350,000.
In contrast, a Collateral Charge allows the lender to register a lien for an amount up to 125% of your property’s value. Using the same numbers, if your house is valued at $450,000 and your mortgage loan is $350,000, the bank can register a lien for $562,500 (125% of $450,000). This means that even though you’re only borrowing $350,000 at closing, the lien registered is significantly higher, providing flexibility for future borrowing.
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. |
When a lender registers your mortgage as a collateral charge, they can record the loan against your property at a value higher than the actual mortgage amount you receive.
This setup allows the mortgage to function like a revolving loan, similar to a personal line of credit.
For example, if you take out a $350,000 mortgage on a home valued at $450,000, the lender can register a mortgage amount of up to 125% of your home’s value with a collateral charge.
That means they might register a lien for $562,500 (125% of $450,000), even though your initial mortgage is only $350,000.
The advantage of this arrangement is that it allows you to borrow from the extra $212,500 (the difference between the registered lien of $562,500 and your actual mortgage loan of $350,000) in the future without needing to refinance or go through legal processes to register a new loan amount.
This makes it easier and more convenient to access additional funds for purposes like home renovations, investments, or debt consolidation.
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One of the primary advantages is the ability to borrow additional money against your home’s equity without the need to refinance.
Since the lender registers the mortgage for an amount higher than your initial loan (sometimes up to 125% of the property’s value), you can access extra funds as you pay down your mortgage principal.
This is particularly useful for:
A collateral charge on a home loan offers several benefits that provide flexibility and convenience for borrowers.
Understanding these advantages can help you make an informed decision when choosing the right mortgage for your needs.
Collateral charge mortgages often come with flexible repayment terms.
You might be able to make interest-only payments on the additional funds borrowed or adjust your payment amounts based on your financial situation.
Lenders can attach various credit products to a collateral charge mortgage under a single registration.
This means you can manage multiple debts—like personal loans, credit cards, or lines of credit—consolidated under your mortgage. Benefits include:
Since the collateral charge is already registered for a higher amount, you may not need a new property appraisal or credit check to access additional funds.
This streamlines the borrowing process and provides quick access to money when needed.
Having a higher registered amount prepares you for unforeseen expenses or financial opportunities.
Whether it’s an emergency or an investment chance, you have readily available funds without the hassle of securing a new loan.
The ability to borrow up to 125% of your property’s value increases your borrowing capacity.
This can be especially advantageous in markets where property values are rising, giving you more leverage to achieve your financial goals.
While collateral-charge mortgages offer flexibility, they also have certain drawbacks that borrowers should consider carefully.
Here are five key disadvantages:
Collateral charge mortgages are not easily transferable to other financial institutions.
Suppose you want to switch lenders at the end of your term to get a better interest rate or different mortgage features.
In that case, you may face legal fees and additional costs to discharge the collateral charge and register a new mortgage with another lender.
This lack of portability can reduce your negotiating power and potentially keep you tied to less favourable terms with your current lender.
The ease of accessing additional funds can lead to the temptation of borrowing more than necessary.
Since the lender has registered a higher loan amount against your property (up to 125% of its value), you might accumulate additional debt without the usual credit approval processes.
This can increase your overall debt burden and potentially lead to financial strain if not managed carefully.
Collateral charge mortgages often come with more complex terms compared to standard mortgages.
Understanding the implications of the collateral charge, how additional borrowing works, and the impact on your property can be challenging.
This complexity requires you to thoroughly review and comprehend the mortgage agreement to avoid unexpected surprises down the line.
Since a collateral charge can encompass various credit products the lender offers—such as credit cards, personal loans, and lines of credit—your home becomes security for these additional debts.
This means that defaulting on any of these obligations could put your property at risk, as the lender has a claim against your home for all the combined debts under the collateral charge.
Having a collateral charge registered for a high amount on your property can affect your ability to obtain additional financing from other lenders.
The large registered charge may signal to other financial institutions that your property is already heavily encumbered.
This perception can make them less willing to extend new credit or offer competitive rates.
Even if you have substantial equity in your home, lenders might hesitate due to the apparent high level of existing debt.
Collateral charge improves the flexibility of mortgages and can be a great tool if used properly. It allows you to approve a loan quickly. All these loans are combined under one umbrella and secured by the collateral of your house.
If used correctly, you will be able to access the equity in your property without necessarily refinancing your mortgage, thus saving you possible penalties and origination fees.
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