Collateral – something pledged as security for repayment of a loan, to be forfeited in the event of a default.
Makes sense right? Your home is Collateral.
Don’t make your payment, they take the home. But that is not the definition we are using here. Collateral Charge is what we are going to talk about.
In Canada there are two ways to register a mortgage. The first is called a Standard Charge. A Standard Charge Mortgage is transferable and assignable. Meaning that at the end of your mortgage term you are free to move your mortgage to a new lender with no requirement of full discharge. i.e. Without using a lawyer like a refinance. The small legal charge is taken on by the new lender and off you go, new mortgage company, same amortization, and now a potentially lower rate. Regular charges were the lay of the land, the lender could only register the individual loan instrument and that was that.
The attraction of access to equity is what has changed our world of Standard Charges. What I mean is a Collateral Charge Mortgage is technically readvanceable. So the lender registers a mortgage sometimes up to 125% of the property value. Their sales technique while suggesting this is, “if” in the future the client needs to access more equity, they can do so without having to have a lawyer involved. But the verbiage of the contract you sign holds something you may not have been prepared for or aware of. That is that a Collateral Charge Mortgage allows the lender to collect on non mortgage debt from you. So say you co-signed a car loan for a “friend”. The friend decides to stop paying… you may have guessed whats next. The lender has the ability to simply attach the debt to your mortgage, same goes for an unpaid credit card, or overdraft in an account. In signing a Collateral Charge Agreement you have given the lender the ability to arbitrarily attach debt to your biggest asset: Your home.
If you have a Home Equity Line of Credit with your lender, that is in the form of a Collateral Charge. This is needed because of the fact that its readvanceable. So the components of the registered mortgage are always changing in value. Your principal owing on the mortgage goes down, your available line of credit balance goes up!.
To be honest I’m quite sure they could have figured out a product to do this in a standard charge, but that wouldn’t offer them the protection of knowing they have commandeered up to 125% of your Home’s equity. Actually… They could do that in a standard charge too!
As a Mortgage Broker, I do my best to educate clients on the differences in products and lenders. What I’ve mentioned about Collateral Charge Mortgages is very true. Unfortunately, most find out after they needed to know. I’d be happy to discuss more about the in’s and out’s of different mortgages. Feel free to call me any time at 905 334 9111.
Jivan Sanghera BA AMP
Circle Mortgage Group