What is a Collateral Charge Mortgage?

What is a Collateral Charge Mortgage?

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    Published 16/12/2020 14:12 EST
    Updated 16/12/2020 15:12 EST

    A collateral charge involves a specific method of securing a mortgage or loan against your property. The primary difference when compared to a standard charge mortgage is that a collateral charge registers the mortgage for more money than you require at closing. 

    For instance, the collateral charge can be up to 125% of the appraised value of your home at closing with some banks or 100% through many credit unions, instead of the amount you need to close your transaction (as is the case with a standard charge mortgage). 

    Key Takeaways
    • A collateral charge mortgage can be registered for up to 125% of the appraised value of your home, which gives you automatic access to more money
    • A collateral mortgage is readvanceable, meaning that you have easy access to future funds without legal services, as the amount has already been approved and registered
    • Collateral charge mortgages are difficult to transfer from one lender to another, which can limit your options as renewal

    👆 Tip

    Ask your lender if you can pick the amount to be registered as your collateral charge to offer added flexibility

    How is a collateral mortgage calculated?

    Some lenders automatically register a collateral charge for more than the loan amount – up to as much as 125% of the appraised value of your home – as a default. Other lenders may ask you to choose the dollar amount to be registered. 

    The calculations vary by lender, so it’s important to understand how your mortgage is being registered and the exact amount involved.

    Advantages and disadvantages of collateral mortgages

    Before you sign a mortgage commitment, it’s important to weigh the pros and cons of a collateral charge mortgage. This is especially significant given that several lenders exclusively offer collateral charge mortgages.

    The main advantage of a collateral mortgage is that it’s readvanceable. This means that you have easier access to future funds without legal services, as the amount has already been approved and registered in advance.

    An important disadvantage of a collateral charge becomes evident when it’s time to renew your term or refinance your mortgage. If you wish to keep your options open at maturity and ensure you have negotiating power with your lender, this isn’t the best product feature because collateral charge mortgages are difficult to transfer from one lender to another. In most cases, if you want to change lenders in order to seek a better product or rate in the future, you have to start from the beginning and pay new legal fees, which typically range between $500 and $1,000. 

    With a standard charge mortgage, however, the new lender will often cover these charges under a straight switch in order to earn your business. 

    In addition, with a collateral charge, it could be difficult to obtain a second mortgage or a home equity line of credit (HELOC) unless your home value significantly rises. When you have a higher outstanding mortgage balance, this translates to less available equity for you to access.

    👆 Tip

    Ask your nesto advisor which mortgage product – standard or collateral – makes sense for you

    If you need to borrow more with a standard charge mortgage, you have the option of a refinance, second mortgage or a HELOC, which also enables you to access equity as your mortgage balance is paid down.

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