When it comes to mortgages, your lender has two options for registering it:
- Mortgage charge
- Collateral charge
If they choose to use the mortgage charge, your lender will register the property with the registry office in your municipality or the land title company. At that point, the mortgage will be able to be discharged, registered, or transferred from your lender.
The second option is the collateral charge. If the lender chooses this option, the mortgage can only be registered or discharged from the lender, and it cannot be transferred. This has significant implications on what you can and can’t do with your mortgage, and these details might not always be obvious. This article will be more about the advantages and disadvantages of a collateral mortgage and how it can affect your mortgage. If you believe that you will need to borrow more money during the mortgage term, the collateral mortgage option makes the most sense.
Collateral mortgage explained
A collateral mortgage is defined as a mortgage product that is re-advanceable. This means that, as property values rise, your lender is able to offer you an increase in the available funds without having to deal with the paperwork and refinance process. Instead, the lender simply registers your home with a collateral charge similar to home equity and can provide you with a higher amount than the loan amount needed for the home.
When your lender uses a collateral charge to register your home, you may borrow money at any time that you need to without having to go through the hassle of the refinancing process. This means that it’s easier- and cheaper- to borrow money in the future from your current lender because you don’t have to hire a real estate attorney to guide you through the refinance process.
Advantages & disadvantages of a collateral mortgage
As with everything else in the world, a collateral mortgage has advantages and disadvantages attached to it. We will discuss those below.
Let’s first take a look at some of the advantages of a collateral mortgage over a traditional one:
- Flexible: you may have the ability to borrow money from your mortgage lender at any time you need it.
- You can borrow the money without having to deal with the legal costs that come with refinancing.
However, there are also a few disadvantages that come with a collateral mortgage. We will look at those below:
- Even if your mortgage is up for renewal, you’ll have to pay legal fees if you decide to switch to a new lender.
- On paper, it appears that you have more debt than you actually do, which means you may have difficulty getting financing for other things.
How are collateral mortgages calculated?
Once you have put in an offer on a home and it’s accepted- and the home inspection has been completed, you will sit down with your mortgage broker or lender to start the financing process. If you choose to go with a lender who offers a collateral mortgage, you might be eligible to register your mortgage for up to 125% of the new home’s value.
Purchase a home valued at $300,000. After making a 20% down payment, which will be around $60,000, you will need to get a mortgage loan for $240,000. But first, let’s find out what the maximum amount would be that you could get on a collateral mortgage:
- Determine value of registered home with collateral mortgage:
- Value: $300,000
- Max loan-to-value: 125%
- Max registered home value: $375,000
Keep in mind that not all lenders will be willing to register your mortgage for more than the original amount of the mortgage. For this example, the original mortgage value was $240,000. However, some can and will. For those who do offer this type of mortgage, when property values go up, you can borrow up to 80% of the new appraised value, minus what you already owe on the mortgage. Therefore, you would need to determine the available equity.
- Determine your available equity:
- New Value of property: $350,000
- Max loan-to-value percentage: 80%
- Max available equity: $280,000
- Currently owe: $150,000
- Final available equity: $130,000
Always keep in mind that regardless of how much your property values increase, the maximum equity you can get your hands on is the same as the original registered amount of your collateral mortgage.
For the example above, this means that the original collateral mortgage was $375,000. In order to get the full $375,000, the property values would need to go up to $468,750. This would leave you owing nothing on your mortgage.
However, if the lender registers your mortgage for the original amount, you may have the option of borrowing up to 100% of the original amount, minus what you already owe without having to deal with the hassle of the refinance process. Below, we’ll see how you would calculate available equity in this case:
- Determine available equity when original mortgage amount is used:
- Original amount: $240,000
- Currently owe: $150,000
- Available equity: $90,000
Either way, regardless of the amount your mortgage is registered for, a collateral mortgage is re-advanceable, which means that you can borrow equity from your home when you need it without the hassle of refinancing.
There are two options when it comes to mortgage loans: traditional and collateral. On a collateral mortgage, you have the ability to borrow more money when there is equity available or if your property values go up without refinancing. However, if you have a traditional mortgage and you need some spare cash, you will have to go through the refinance process.