What is a Collateral Charge?
What is a Mortgage 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 Mortgage 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 refinancing your mortgage. A standard charge is also typically easier when it comes to obtaining secondary mortgage financing however it is important to note that some mortgage lenders have condition with respect to subsequent financing. The reason being is because a second mortgage lender will be able to more confidently underwrite and lend behind the balance of the standard mortgage charge compared to a collateral charge which is typically registered on title for an amount much higher than the actual mortgage balance. Accordingly, a second mortgage lender may have concerns that the first mortgage lender may advance additional funds after the registration of the second mortgage which will affect the second mortgage lenders loan to value and equity cushion.
What is a Collateral Mortgage 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.
Which Mortgage Lenders Typically Provide Collateral Mortgage Charges?
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 Mortgage 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 Second 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 may need to discharge your existing first mortgage and find another mortgage with sufficient funds to discharge the existing mortgages, potential prepayment penalties and the additional funds that you were looking to borrow. It is important to note that a borrowers income and credit profile will ultimately determine what new mortgage they may qualify for. In other words, if their situation has changed from the time they took out the existing mortgage, or the mortgage interest rate environment is different, they may face the reality of higher interest rates or entering the realm of alternative or private mortgage financing.
Is a Second 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.