Since an increasing number of lenders seem to be moving towards collateral charge mortgages these days, it has never been more important to understand the differences between a collateral and standard charge mortgage.
The primary difference is that a collateral charge mortgage registers the mortgage for up to 150% more than either the mortgage amount or property value in the case of some banks and credit unions instead of the amount you need to close your transaction (as is the case with a standard charge mortgage).
The major downside to a collateral mortgage becomes evident at your mortgage renewal date. For borrowers who want to keep their options open at maturity and have negotiating power with their lender, this isn’t the best product feature because collateral charge mortgages are difficult to transfer from one lender to another.
In other words, 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 range from $500 to $1,000. With a standard charge mortgage, in most cases, the new lender will cover the charges under a “straight switch” in order to earn your business. In addition, with a collateral charge, it could be flat out impossible to get a second mortgage (or secured line of credit) unless your home significantly appreciates in value.
Lenders offering collateral charge mortgages promote the benefit that it makes it easier and more cost effective to tap into your equity for such things as debt consolidation, renovations or property investment. There’s no need to visit a lawyer and pay legal fees – the money is available as your mortgage is paid down. Yet, if you read the fine print, you still may have to re-qualify at renewal.
A standard charge mortgage gives you the ability to move to another lender at renewal should you want to without incurring legal fees. In other words, it’s easier for you to keep your options open. If you need to borrow more with a standard charge mortgage, you have the option of a second mortgage or a home equity line of credit (HELOC), which also enables you to take money out as your mortgage is paid down.
Navigating through the mortgage process alone can be tricky. Working with a mortgage professional who has access to multiple lenders will help ensure you receive the product and rate catered to your specific needs.
Angela Calla, AMP
Dominion Lending Centres
604-802-3983 firstname.lastname@example.org t:@angelacalla
Host of The Mortgage Show Saturdays at 7pm on CKNW AM980