There are two main differences between a collateral charge mortgage and a standard (traditional) charge mortgage.
- A collateral charge is re-advanceable — The borrower can request to borrow additional funds for projects other than the purchase of the property, without incurring legal fees as you would with a refinance. However, additional funds are not automatically granted. The borrower must first re-qualify based on applicable credit standards and get approval from the lender. The request for additional funds could be denied if the borrower’s financial situation has changed, for example due to the loss or change of job. The request may also be denied if the value of the property is insufficient to secure the additional funds.
- A standard charge is transferable — If the borrower decides to switch lenders, the borrower may be able to transfer the mortgage to the new lender rather than getting a new mortgage. In the case of a collateral charge mortgage, the new lender may refuse to allow the switch through a transfer. In this case, the borrower will have to get a new mortgage and will therefore need to pay the legal fees associated with its preparation and registration.
Sometimes, collateral charges also allow your lender to do things like change your interest rate, increase your loan amount, and use your available credit to pay down other debts you have secured with that lender (if you default on those debts).
Some lenders will register collateral mortgages for up to 125% of the property value. This could allow you to re-advance a higher amount than you originally borrowed if your property value increases significantly. However, you may have a tough time securing secondary financing for other things by having a larger amount registered. On paper it may appear that you have more debt than you actually do.
If you’re considering a collateral charge, have your mortgage broker fully explain the pros and cons before you jump in.