We hear that collateral charge mortgages can provide a cost effective way to refinance, as well as offer future flexibility. It is important to understand the pros and cons of a collateral charge mortgage. To do this we’ll start by describing the difference between a collateral charge and a conventional mortgage.
A collateral charge mortgage is type of mortgage that allows your home to be used as security for a loan (home, line of credit, or car).
Lenders offering this type of mortgage may register the charge for up to 125% of the property value, which is more than the approved mortgage amount. For example, if your home purchase was for 300,000.00, with a 20% down payment (60,000). the collateral charge mortgage registered could be as high as 375,000 (300,000 x 125%), but you would only receive 240,000.
On the other hand, with a conventional mortgage if you were to make the same purchase (300,000 with a 20% down payment – $60,000) the mortgage registered on the property title would be the remaining 240,000.00, which is the actual mortgage amount.
PROS / CONS OF A CONVENTIONAL MORTGAGE
- At the time of renewal a conventional mortgage may be ‘switched’ to another lender to take advantage of a better product (prepayment options, rates overall flexibility).
- It is possible to have a second mortgage (a home equity line of credit) registered behind the lenders first mortgage.
- Not all lenders have standardized early discharge penalties
PROS / CONS OF A COLLATERAL CHARGE MORTGAGE
- If you qualify (and the lender approves) you could borrow more money (up to the registered amount) without having to register another mortgage (saving legal fees).
- A collateral charge mortgage cannot be ‘switched’. To take advantage of a better product you would likely have to pay a fee to discharge your mortgage and pay off any car loan or line of credit associated with the collateral charge mortgage.
- The lender may utilize the collateral mortgage to pay any unpaid debts you may have with them. For example if you defaulted on a credit card the lender could increase your collateral mortgage amount to payout the debt.
- If you wanted to refinance to use the equity built in your home and the lender declines your application you couldn’t approach another lender because the home is secured against the collateral mortgage (375,000 from the example above) so it looks like there is no equity available to secure the application.
Clear as mud, right? The bottom line is to ask questions and make sure your mortgage is working for you now, and will continue to in the future.
This is what we do best so please call today and together we’ll do our best to ensure you are receiving the best mortgage product available for both today and your future needs.