Mortgage charges can help or hinder homeowners
Monday Nov 06th, 2017
If you're shopping for a mortgage, it's important to think about the long-term implications of the contract you're signing. One little-understood aspect of a mortgage contract is how the mortgage security will be registered.
Ask each lender you contact whether they will register the mortgage security with a standard or a collateral charge. The charge gives your financial institution the right to sell your home if the loan is not repaid as agreed.
Investigate your options to find one best suited to your needs.
Standard charge vs collateral charge
With a standard charge, the specific details of the mortgage loan (e.g., the amount, term and interest rate) are included in the charge registered on the title to the property. A standard charge is registered for the actual amount of the mortgage loan.
With a collateral charge, the specific details of the mortgage loan might not be included in the charge, and it can be used to secure multiple loans with your lender, including a mortgage and a line of credit. The charge can be registered for an amount that is higher than your actual mortgage loan. This could allow you to borrow additional funds in the future, if you want to.
For example, let's say you want to buy a house valued at $400,000; you've got a $150,000 down payment, so you need to borrow $250,000 to buy the house.
With a standard charge, the amount registered would be $250,000. Should you want to borrow additional funds at a later date, you would have to register a new mortgage, and that can be costly.
With a collateral charge, the amount registered may be higher than the actual amount you need to fund the house purchase. For example, it might total $290,000. You only make payments and pay interest on the money you actually borrow, not on the amount of the charge. So you have the $250,000 to complete the house purchase, and should you want to borrow all or part of the additional $40,000 later on, you may not need to register a new charge and there may not be any costs to do so.
Access to extra funds is not automatic
With a collateral charge mortgage, you will need to apply for the additional funds and re-qualify based on the lender's current criteria, the property value and your ability to repay the new loan amount.
When the term on a standard-charge mortgage ends, typically other lenders will accept an assignment at little or no cost to you. The assignment means the existing charge is assigned to the new lender rather than being discharged and replaced with a new charge.
By contrast, other lenders may not accept the transfer of your collateral charge mortgage. Instead, you may need to discharge your existing mortgage and register a new mortgage with the new lender. This may be costly. When you discharge your mortgage, all loans secured by the collateral charge must be repaid in full or transferred to the new lender.
What's a HELOC?
A home equity line of credit is an option for borrowing on your home's equity, which is the difference between the value of your home and the unpaid balance of any current mortgage. A HELOC is secured by your home and registered with a collateral charge.
After it is set up, you do not need your lender's approval to borrow funds up to the credit limit, subject to the HELOC terms.
More information is available at itpaystoknow.gc.ca.