Collateral charges explained. Short and sweet.

A collateral charge mortgage is a method of registering a mortgage on a property's title up to or above the value of the home with the purpose of making futuring borrowing against the home easier. In contrast, a regular mortgage is only registered against the property for the total amount borrowed. Ex: If your home value is $410,000 and you owe $307,000 the mortgage registered against your title may still be as much as $410,000 or even higher.

The benefit is supposed to be that you can then borrow money from your home in the future without having to refinance your mortgage, meaning you avoid the legal process however, your lender may still charge a fee to advance additional funds. In order to borrow more you're still required to qualify and an appraisal is still needed which you may be required to pay for.

The primary disadvantage to a collateral charge mortgage is that they can't be simply transferred to a new lender in order to take advantage of a better mortgage product or lower interest rate. For a regular mortgage transfer, a mortgage broker can simply seek out a new lender who would handle the transfer of the mortgage for you with the assistance of FCT (First Canadian Title) and there is almost never any cost to you, the borrower. In the case of a collateral charge mortgage, you would need to employ a lawyer to remove the collateral charge from the title before being able to proceed with registering a new lender which means you have to pay additional legal fees. Other disadvantages are that if you have other debts with that same bank/lender, they may register those debts against your title. This means it possible that the bank could come after your home for debts that have nothing to do with your mortgage.

Overall, you should avoid getting yourself involved with a collateral mortgage if you have no need for a line of credit or no plans to borrow more against your home in the near future. It won't prevent you from moving lenders in the future but, it can cost your more money and limit your future options.

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