Collateral vs. Conventional Mortgage
There are two types of mortgage charges:
• A standard charge is where the amount of mortgage money you are requesting is secured to the title of your home. A standard charge mortgage will cost you less to break, is easy to add a secured or unsecured line of credit behind. A standard charge is simple to move to several lenders at renewal if there is a better mortgage option for you when you are shopping around.
• A collateral charge is where multiple products or a higher mortgage amount are secured to the title of your home by the lender, this is typically a mortgage and a line of credit. The total charge amount will be more than what you are borrowing in the mortgage. How a typical collateral charge works is that you as you pay down your mortgage amount that amount becomes available to you on the line of credit. A collateral product can be great for some people, such as those starting out a new business and needing to access equity from their home to do so. A collateral mortgage allows you to access funds quickly without an additional credit check or new appointment with your lawyer should you be planning to borrow more money. The negative aspects of a collateral charge are: higher prepayment penalties, difficult to move even at renewal, and the potential for higher legal fees when setting it up & leaving it.
Mortgage Options: In today’s diverse mortgage market there is a lender with a perfect product for you. This may be a collateral charge product or it may not.
Some factors you and your mortgage professional will use to determine this are:
- Are you likely to need access to additional funds in the near future?
- Are you likely to require breaking your mortgage during your term (as 60% of Canadians do)?
- What is your mortgage balance?
- Do you have/need other debt products that may be replaced by collateralized products?