What is a Collateral Mortgage anyway?

If all the word collateral conjures up for you are images of Jamie Foxx and

Tom Cruise in a taxi cab together then I don’t blame
you, but don’t let all the jargon confuse you because collateral mortgages are
more straightforward than you may think. 

In most cases, you probably wouldn’t even notice the difference between
a “traditional” or “collateral” mortgage because in terms of how you see your
mortgage details on your statement or online banking both types would look the
same.  The main difference between a
“traditional” mortgage and a “collateral” mortgage is in how the lender
registers it.

So, you ask, why would there be different ways to register
something?

1) The traditional mortgage is a charge registered with the
land title office that has a fixed amount and set terms and conditions.  For example, if the mortgage is for $300,000 then the traditional registration would reflect this, and if you needed more
money in the future you’d have to refinance and pay legal fees.

2) A collateral mortgage is essentially a re-advanceable or
“running” charge, meaning that it is registered in a way that gives you the
opportunity to borrow more money from your lender as the property value
increases without going through a lawyer again. 
This is usually achieved by registering the value of the property (or sometimes
more).  For example, your purchasing a condo at $500,000, your mortgage is
$300,000, the lender gives you a mortgage of $300,000 but registers $500,000,
so as your property value goes up you can apply for an increase to your
mortgage from your current lender and save funds because you don’t have to pay
new registration costs.

Collateral can be a great option if you:

-anticipate borrowing more money in the short term

-would like to split your mortgage into multiple interest
rates and terms and/or would like multiple home equity credit lines

-are concerned about the cost of legal fees

However, on the downside, these charges can make it more
costly to transfer between lenders at renewal because collateral charges are
not transferrable, so if you’re looking to move your mortgage at maturity you
might get hit with a legal fees bill then.

In addition, this type of charge can make it more difficult
to get secondary financing.  If you’re
looking to use your property in future for other financing many collateral
charges don’t permit second mortgages behind them.  For example, let’s say you’re a business
owner who’s wanting to use your personal residence to secure a form of business
lending – if the collateral charge is registered for a high amount or doesn’t
allow a second charge it could limit your ability to do that.

This type of charge is becoming more and more common, with
many lenders offering it as their premier mortgage product.  It’s a great solution in some cases, and in
others it may be altogether unnecessary. 
Keep in mind that the main advantage is having the flexibility to borrow
more money simply, but if this isn’t a priority for you then there may be more
competitive or cost-effective options outside of the collateral mortgage to
consider.

Questions?  Let’s talk.