Lenders must register the mortgage loan by way of two methods:
- Mortgage charge: The mortgage provider registers your home with the registry or land title office within your municipal district. The mortgage is then registered, transferred or discharged by the provider.
- Collateral charge: The mortgage provider registers the property under the PPSA or Personal Property Security Act of Canada. In this case, the mortgage provider can only register or discharge the property but not transfer it. It is advisable to understand exactly how the collateral charge works in case you need to take out another loan while the term of your mortgage is still existing.
What is a Collateral Mortgage?
Should you need more money during the term of your mortgage, you can get your lender to advance you the added cash according to the rising value of your property without the need for you to refinance the mortgage. To lend you the money you need, your lender registers your property with a collateral charge just as he would for a home equity line of credit. In this way, your lender can register the property for an amount that is higher than the mortgage loan amount that you require.
Once your home is registered with a collateral charge, you can borrow any amounts you need against your home without the need to refinance the mortgage. The costs for taking additional loans including legal fees is also lowered since you won’t need to engage a real estate lawyer to assist you through the refinancing process.
Having taken out a collateral mortgage with one lender, you cannot transfer it to another lender at any time including the end of the term of the mortgage. This is because each lender has his own terms and conditions. Since the lender does not register the collateral loan agreement with your land title or registry office, its terms and conditions may not be acceptable to the new lender. Should you need to break the collateral loan agreement, you’ll have to comply with the legal formalities with the help of a real estate lawyer.
What are the Pros of a Collateral Mortgage?
Opting for a Collateral mortgage has several advantages:
- You need not incur any legal charges involved in the refinancing procedures
- You can borrow funds against your house whenever you need them.
What are the Cons of a Collateral Mortgage?
Opting for a Collateral mortgage has a few disadvantages you need to be aware of:
- Each time you switch to a different lender even if the mortgage term has ended and needs to be renewed, you’ll incur the legal fees.
- The loan amount on the registered collateral mortgage agreement may be higher than what you actually owe. For this reason, you may find it difficult to raise funding for any purpose.
How is a Collateral Mortgage Calculated?
In case your mortgage provider enters into a collateral mortgage agreement with you, he can register your mortgage for an amount of up to 125% of the value of the property you just bought.
For instance, you may have bought a home that carries a value of $300,000. After paying a down payment of 20% or $60,000, you’ll need to take out a mortgage loan for the balance 80% or $240,000. Some lenders may choose to register the property for $240,000 or the original mortgage amount. However, some others may choose to register for a higher value or collateral mortgage, so you need to properly calculate your mortgage rates.
In this case, if the value of the property appreciates and becomes $350,000, you can take out a loan of up to 80% of the new value after deducting the payable amount remaining on your mortgage. In this way, you won’t have to refinance your property.
Which Lenders Offer Collateral Mortgages?
The TD Bank (beginning on October 18, 2010) and Tangerine Bank (beginning on December 10, 2011) are two banks in Canada that offer you collateral mortgages aside from various other lenders. When taking out a mortgage, check with your mortgage provider about your options of getting a collateral mortgage.