Collateral mortgages

There are two ways a lender can register a mortgage loan: they can use a mortgage charge or a collateral charge. With a mortgage charge, the lender will register your home with the land title or registry office in your municipality, and the mortgage can then be registered, transferred or discharged from your lender.

A collateral charge, on the other hand, is registered under the Personal Property Security Act (PPSA) of Canada, and can only be registered or discharged (not transferred) from your lender. Keep reading to find out why and how this affects your mortgage.

Collateral mortgage make sense when you think you will need to borrow more money during the term of your mortgage.

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What is a Collateral Mortgage?

A collateral mortgage is a readvanceable mortgage product, meaning that your lender can lend you more money as your property value increases without having to refinance your mortgage. To do so, the lender registers your home with a collateral charge similar to what they do for a home equity line of credit, and have the ability to do so for a higher amount than the mortgage loan amount you need.

By registering the home with a collateral charge, you can then borrow money from your home at any time, without having to refinance your mortgage. This makes future borrowing from your current mortgage lender easier and cheaper, as you would then be able to avoid the legal fees incurred by having to hire a real estate lawyer to help you through a refinance.

One important thing to consider about collateral mortgages, however, is that they cannot be transferred to another lender – not even at the end of your mortgage term. The reason it’s not transferrable is because the collateral loan agreement was not registered with your land title or registry office, so it may contain terms that other lenders don’t agree with. If you ever decided to switch lenders, you would then need to hire a real estate lawyer to help get you out of your collateral loan agreement.

What are the Pros of a Collateral Mortgage?

The benefits of getting a collateral mortgage include:

The flexibility to borrow money from your home at any time, and
The ability to avoid the legal costs associated with refinancing

What are the Cons of a Collateral Mortgage?

The downsides of a collateral mortgage include:

The need to pay legal fees, if you switch to another lender, even if your mortgage is up for renewal
The fact that, on paper, it could look like you have more debt than you do (By having a larger amount registered, you may have a tough time securing secondary financing for other things)

How is a Collateral Mortgage Calculated?

After your offer on a home has been accepted, and it passes the home inspection, you’ll sit down with a mortgage broker or lender to get your mortgage financing ready. 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 new home.

For example: Let’s say you purchase a home valued at $300,000. After you make a $60,000 down payment (20%), you would require a $240,000 mortgage loan. Let's determine the maximum amount the lender may be able to register under a collateral mortgage.

Step 1 : Determine registered home value with a collateral charge mortgage

^$300,000 home value 125^% max loan-to-value ratio

^$375,000 max registered home value

Not all lenders will register your mortgage for more than your original mortgage amount (in this case: $240,000), but some can and do. For those that do, if the value of your property goes up (let’s say to $350,000), you could borrow up to 80% of the new appraised value – minus what you still owe on your mortgage – without having to refinance your mortgage. If you still owed $150,000 on your mortgage, you would calculate your available equity as:

Step 2 : Determine available equity

^$350,000 home value 80^% max loan-to-value ratio

^$280,000

^$280,000 ^$150,000 amount owing

^$130,000 available equity

One thing to keep in mind is that, no matter how much the value of your property goes up to, the most equity you can ever access is the same amount your collateral mortgage was originally registered for. In the example above, the collateral mortgage was registered for $375,000. To access the full $375,000, the value of your home would have to go up to $468,750 ($468,750 x 80% = $375,000) and you would have to owe nothing on your mortgage ($375,000 - $0 = $375,000).

If your lender only registers your mortgage for the original mortgage amount, you could borrow up to 100% of the original mortgage amount – minus what you still owe – without having to refinance. In this case, if you still owed $150,000 on your mortgage, you would calculate your available equity as:

Step 3 : Determine available equity

^$240,000 original mortgage amount ^$150,000 outstanding mortgage

^$90,000 available equity

Either way, no matter how much your mortgage is registered for, a collateral mortgage is a readvanceable mortgage product that lets you borrow equity from your home at anytime without having to refinance your mortgage.

Which Lenders Offer Collateral Mortgages?

Most lenders offer collateral mortgages, but there are two banks in Canada that only offer collateral mortgages: TD Bank (as of October 18, 2010) and ING DIRECT (as of December 10, 2011). When you’re discussing your mortgage options, make sure to ask your mortgage broker if the product you’re considering is a collateral mortgage or not.