What is a Collateral Charge?
What is a Charge?
A charge, or a mortgage of land, refers to the registration made on title of your property in relation to the mortgage. Whether you are purchasing or refinance your property, your mortgage lender will register a charge against your property. There are two different types of mortgage charges and each have their own respective setups.
What is a Standard Charge?
A standard charge is the most usual type of mortgage charge. In most cases, your mortgage lender will register an amount on title that is equivalent to the actual mortgage amount. If you are planning to switch mortgage lenders during the term, it is often possible to do so by way of an assignment of charge. A standard charge will also enable secondary financing without any grievance from mortgage lenders assuming all else is equal.
What is a Collateral Charge?
Unlike a standard charge, your mortgage lender might register an amount on title much greater than the actual loan amount. Most often, and depending on the mortgage lender, the charge will represent 100% – 125% of the property value. Irrespective of the amount registered on title, you will only make mortgage payments based on the actual loan amount. Mortgage lenders that offer collateral charges will often attempt to entice you with seemingly attractive perks. For one, that you may borrow more funds without needing to register new loan with legal and closing costs. The problem becomes, what if you do not re-qualify for the additional funds? Providers of collateral charge mortgages are federally and provincially regulated lenders that must follow government prescribed underwriting policies. In other words, you might not be able to work your way around qualifying for the top-up. Also, when it comes time to transfer, not all mortgage lenders accept collateral-charge transfers. This will result in your needing to discharge your mortgage and incur associated discharge costs.
Who are the Collateral Charge Usual Suspects?
TD Canada Trust – TD Home Equity FlexLine
Scotia Mortgage – Scotia Total Equity Plan (STEP)
Royal Bank of Canada – RBC Homeline Plan
Can I Transfer Lenders with a Collateral Charge?
In some cases you are able to transfer your collateral charge mortgage to another institutional mortgage lender. The main benefit from the transfer comes down to the fact that you can avoid prepayment penalties associated with breaking your collateral charge mortgage. Also, you might be able to transfer your readvanceable mortgage with relative ease. You might be able to combine two separate charges (mortgage and line of credit) into one new mortgage. Keep in mind that you will need to qualify for the new mortgage and this includes enduring the stress test. Should you not qualify to transfer your collateral charge mortgage and require access to your home equity, please read below.
Can I Take Out a 2nd Mortgage?
If you are looking to obtain a home equity loan or a second mortgage you might be in for a rude awakening. In 2019 when you closed on your home purchase for $500,000 you received a first mortgage of $350,000. Over the past year you accumulated $85,000 in credit card debt from unexpected business expenses and you wish to consolidate this debt by accessing your home equity. You complete the paperwork for your $50,000 second mortgage only to learn that your mortgage lender will not advance the loan. Your mortgage lender approved you for a second mortgage of $75,000 based on a first mortgage balance of $335,000 and an appraised value of $525,000 = 80% loan-to-value. The problem? You realize that your first mortgage was registered as a collateral charge for $500,000 representing 100% of the purchase. In the eyes of your second mortgage lender, their loan-to-value is now technically 84% which exceeds their LTV limit of 80%. This may get worse. You go back to your bank and plead for them to re-register your first mortgage charge as a standard charge and remove the collateral charge. Our Principal Broker stated that in over 10 years he has very rarely seen a mortgage lender make the change. What happens when they don’t? Depending on your need to borrow funds, you will need to discharge your existing first mortgage and find another mortgage. You will be subjected to a prepayment penalty and worse than that, you run the risk of not re-qualifying for traditional financing. You might need to venture into a higher interest rate environment.
Is a 2nd Mortgage Possible?
Yes! In the event that your first mortgage collateral charge registration prohibits you from obtaining a second mortgage, we have a workaround. We have access to mortgage lenders that will provide you with a second mortgage and focus only on the actual mortgage balance instead of the collateral charge registration amount. This means that your mortgage lender might run the chance that your first mortgage lender will deem you qualifiable for a loan top-up. In theory, by doing so, your mortgage lender might find their loan to be well over the value of the property. However, you will receive a home equity borrowing solution without the cost of breaking your low interest rate first mortgage. There are very few second mortgage lenders that will take this route so it is important to position yourself with an experienced mortgage broker.
By no means are we bashing a collateral charge mortgage, in fact we believe that each mortgage product works well for the right borrower. However, in our experience, we have witnessed countless cases of clients being prohibited by collateral charges. Also, these clients have been completely unaware that their mortgage has been registered as a collateral charge, and specifically, the ramifications of a collateral charge when it’s time to access home equity.