When you get a mortgage, your lender will register what is known as a “charge” on your land title or deed. This process stops you from making any changes to the title (like later selling) without them knowing. How they register the charge varies and may have implications to you as the property owner down the road.
Standard charge mortgages
- Usually registered for actual amount of mortgage loan: For example, if you require a mortgage loan of $240,000 to buy a home that costs $300,000, the lender will usually register the standard charge for the actual amount of the loan ($240,000).
- Costs to switch lenders: If you decide that you want to switch your existing mortgage to a different lender at the end of your term, and your new lender agrees, it is generally possible to do so by transferring your mortgage. This is referred to as an assignment. Your new lender may be willing to cover some or all of your costs to switch lenders.
- Borrowing additional funds: If you are in a situation down the road where you want to (or need to) borrow additional funds, you can either arrange a new "second position" mortgage (likely at higher rates) or you can cancel the current mortgage and replace it with a new one. In both cases, you will likely need to pay legal and appraisal fees to arrange the new lending. There are specialty second position mortgage lenders who can lend you money, even if your first position lender won't (important point).
Collateral charge mortgages
- Can be registered for a higher amount: This type of charge may allow you to borrow additional funds in the future. For example, a lender could register the charge for 100% (or more) of the value of your home when you are only borrowing 85% of the home’s value.
Even though the charge may be registered for more than your initial loan, you only have to repay funds and pay interest on the money you actually borrow.
After your charge is registered and you receive the initial loan, the maximum amount of additional funds you can borrow against your home is still limited to a total of 80 percent of its value or the amount of the collateral charge, whichever is less. As you pay down your mortgage and the value of your home increases, you may be able to borrow these additional funds.
- Additional funds can be advanced: Allows you to potentially borrow additional money from the same lender without the need to register a new charge and pay the associated legal and other fees. Your home can be used to guarantee other forms of credit from the same lender, such as lines of credit, credit cards and car loans. This is called cross-collateralization.
Note: Access to additional funds is not automatically approved. Your lender will generally need to approve any requests and re-qualify you for additional funds you want to borrow. The lender could refuse your request if your financial situation changes—for example, if you lose your job or get sick. This might be when you need the funds the most! A collateral charge registration (vs a standard charge) reduces the amount of money you could otherwise borrow from your home equity and from a different lender in the event of emergency.
Additional funds you borrow may not be offered at the same rate or terms.
It may be convenient to borrow money with a collateral charge mortgage, but it can also be easy to borrow more than you can comfortably repay.
- Costs to switch lenders: If you want to change lenders at the end of your term, there will be some (but fewer) lenders willing to accept the transfer of your collateral charge mortgage however, a number will have an notary extra fee to pay (~$750)
If you discharge your collateral charge mortgage, your current lender can require you to repay any additional funds that had been secured by the charge, such as car loans.
When you are shopping around, find out if the lender will register the mortgage with a collateral charge or a standard charge. Some lenders in Canada register all new mortgage loans with collateral charges. Ask about it before you get pre-approved so you have time to discuss the potential advantages or drawbacks, and to decide whether the option suits your needs.
