Did you know that several lenders today are exclusively offering collateral charge mortgages? This means it’s more important than ever to understand the differences between a collateral and a standard charge mortgage before signing your mortgage commitment.
The most significant difference is that, under a collateral charge, the mortgage is registered for more money than you require at closing. For instance, it’s up to 125% of the value of the home at closing with some banks or 100% through many credit unions, instead of the amount you actually require to close your transaction, which is the case with a standard charge mortgage.
You may be thinking: Oh wow, more money? Sign me up! But, this isn’t necessarily a good thing. The major downside to a collateral mortgage becomes clear when it’s time to renew your mortgage for another term (once five years has past or however long a term you agreed to in your current mortgage). If you wish to keep your options open at maturity and ensure you have negotiating power with your lender, this isn’t the best product feature because collateral charge mortgages are difficult to transfer from one lender to another.
And even when they’re transferable, you end up facing added costs to do so. If you want to change lenders in order to seek a better product or rate in the future, you have to start from the beginning and pay new legal fees, which typically range between $500 and $1,000.
With a standard charge mortgage, however, in most cases the new lender will cover the charges under a straight switch in order to earn your business.
In addition, with a collateral charge, it could be difficult to obtain a second mortgage or a home equity line of credit – or HELOC – unless your home significantly appreciates in value.
You always want options
Lenders offering collateral charge mortgages promote the benefit that it makes it easier and more cost effective to tap into your equity for such things as debt consolidation, renovations or property investment. There’s no need to visit a lawyer and pay legal fees – the money is available as your mortgage is paid down. Yet, if you read the fine print, you may still have to re-qualify at renewal.
In reality, it’s always more convenient for you to have more options. A standard charge mortgage offers the flexibility to move to another lender at renewal should you wish without paying legal fees. This means you have just as much negotiating power through your mortgage agent at renewal time as you did when you secured your original mortgage.
If you need to borrow more with a standard charge mortgage, you have the option of a second mortgage or a HELOC, which also enables you to access equity as your mortgage balance is paid down.
Have questions about collateral versus standard charge mortgages, or your mortgage options in general? Answers are just a call or email away!