What is a Collateral Mortgage?

Home Equity in Toronto Real Estate

A collateral mortgage is basically a loan, or more than one loan, which is secured when the borrower uses their home or property as collateral. This gives the lender added security since he or she can take over the property if the borrower happens to default on the loan. Before agreeing to a collateral mortgage, it’s recommended that you realize how they differ from a traditional mortgage. Generally speaking, a traditional mortgage will see the homebuyer given a specific amount of money as a loan along with a fixed interest rate. The mortgage is then paid off in weekly, biweekly or monthly instalments over an agreed period of time, just like a traditional mortgage.


How Collateral Mortgage Loans Work

The basics of a collateral mortgage are similar to a traditional mortgage in some ways since it also comes with an agreed length of term and an interest rate. However, a higher amount of money is made available in case you decide to borrow it in the future. With a traditional mortgage, the lender registers the home with the local registry or land title office. This enables you to register, transfer or discharge the mortgage. With a collateral mortgage, it is registered under the PPSA of Canada (Personal Property Security Act) which means it can’t be transferred from the lender, but can be registered or discharged. A collateral mortgage is often used by homebuyers who feel they will likely need an additional loan during their mortgage term.


Collateral Loans Make Additional Borrowing Easier

A collateral mortgage allows the lender to advance additional money to the borrower without the homeowner needing to refinance their mortgage. The home is registered under the collateral charge and it becomes similar to a home equity line of credit and can be listed at a higher amount than the borrower needs for the mortgage. The homeowner can borrow money at any time with the property as collateral without needing to refinance anything. It makes additional loans easier and less expensive as there are no further legal fees involved.


Pros and Cons Of Collateral Mortgages

It’s important to remember that collateral mortgages can’t be transferred over to another lender, even when the mortgage term is over. This is because the loan wasn’t registered with the registry or land title office. If you’d like to switch lenders with a collateral mortgage, you’ll need to enlist the aid of a real estate lawyer to get out of the loan agreement. There are a few pros of a collateral mortgage as they’re quite flexible and enable you to borrow money from the property whenever you like without the need for refinancing. But on the downside, you’ll need to cover the cost of legal fees if you decide to switch lenders, and you can only put an additional charge behind the collateral charge if there is enough equity available in your home based on the collateral charge, not your current loan amount. If you fall behind on your payments, a bank may also raise your interest rate. In addition, on paper, it could appear that you have more debt than you actually do if a higher amount of loan has been registered.

This is because the lender can register the mortgage for as much as 125 percent of the home’s current value. For example, if you bought a $400,000 home and needed a collateral mortgage of $300,000 the lender can register the loan at 125 percent of the $400,000 value. The maximum registered home value would now be $500,000. However some lenders won’t register the mortgage above the actual amount you need to borrow, but they’re entitled to. If the value of the property rises you can then borrow money up to 80 percent based on the newly appraised value, subtracting what is still owed on the mortgage. Regardless of the value of the home, the most equity available to you will be the amount the collateral mortgage was registered for. In this case, it would be $500,000.


Speak With a Professional

In Canada, many lenders will offer a collateral mortgage, including specific banks. There’s no doubt that collateral mortgages can be quite confusing to homebuyers and they’re not ideal for most borrowers. To find out more information regarding collateral and traditional mortgages, please feel free to contact our team of professional mortgage brokers at MortgageMeister.com. We’ll be able to explain all of your options and help you choose the best type of mortgage for your personal and unique situation.

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