What is a Collateral Mortgage?
A collateral mortgage is a re-advanceable mortgage product, meaning that your lender can lend you more money as your property value increases without having to refinance your mortgage and it’ll save you on legal fees. A collateral charge is non-transferable. It cannot be assigned (switched) to a new lender like a regular mortgage. You will have to refinance before you can move your mortgage to a new lender.
The most equity you can ever access is the same amount your collateral mortgage was originally registered for regardless if the property value increases, whereas if your mortgage was registered as a regular mortgage, then you can borrow a higher amount.
- This product is similar to a home equity line of credit (HELOC) meaning the interest rate can fluctuate and you can borrow the amount paid towards this loan
- This product can also hinder your ability to borrow additional loans
If you choose to get a collateral mortgage, the lender may be able to register your mortgage for up to 125% of the value of your property. This will look like you have more debt than you actually do since a larger amount is registered, and you may have a tough time obtaining additional finance or other loans. It can also be a deal breaker based on the amount you’re seeking to borrow based on your liability exposure.
We have come across many situations where clients are not aware of their mortgage being registered as a collateral charge nor are they aware that by checking that box “Collateral Charge” on a mortgage commitment really mean that they’re consenting to register a higher amount on the title instead of the amount advanced.
Have your lawyer do a title search or speak with your lender to understand how your mortgage or line of credit portion is registered.
