Securing a mortgage: collateral versus standard charges
By 8 March 2019 2 min read
If you’re shopping for a mortgage you are probably on the hunt for the best interest rate. You may go back and forth about signing on for a variable or a fixed interest rate, but many borrowers never think to ask whether the mortgage will be secured as a standard charge or a collateral charge. In fact, we’re guessing if you asked a handful of homeowners, many would not know how their mortgage is secured.
Here’s a primer on what the terms mean and how they could affect future borrowing.
If your mortgage is secured as a standard charge that means it is registered with the Land Titles Office for the exact dollar figure of the mortgage. For example, if the mortgage is for $200,000 it is registered for $200,000.
If your mortgage is secured as a collateral charge, it may be registered for more than the value of the mortgage. So, a $200,000 mortgage could be registered for $250,000. This allows the homeowner some flexibility with future borrowing. It could allow for another mortgage or a home equity line of credit (HELOC) without additional legal or administrative fees. If your mortgage is secured with a standard charge, those costs could add up to hundreds of dollars for additional borrowing down the road.
When you opt for a collateral charge, you’ll need to put some thought into the amount you wish to register the mortgage for. Consider things like whether you may renovate the property in the future and how much that could cost. Your lender will be able to help you decide on that final figure.
A mortgage secured as a collateral charge is generally not transferable to another Financial Institution. This doesn’t mean you have to stay with your original lender. But be aware there will be legal fees and administrative costs with the Land Titles Office if you wish to move your mortgage to another bank. Sometimes though, if a lender is eager for your business, they will find a way to make sure those fees are not prohibitive to getting your deal done.
What happens when the mortgage is paid off?
Now, skip ahead to that incredible day when your mortgage is paid off. If you have a standard charge mortgage your lender will either discharge the mortgage security automatically or upon your request. The mortgage security on a collateral charge mortgage cannot be discharged until all the loans secured by the charge are repaid.
According to the Financial Consumer Agency of Canada, some lenders in the country register all mortgages as collateral charges, some use only standard and others use both*.
Make sense? We know it can be a bit confusing, so the key question to ask is, how will my mortgage be registered? That’s a good place to start the conversation with your lender, who should be able to walk you through the offer and explain the pros and cons.
* Currently at ATB Financial, conventional mortgages are secured by a collateral charge and insured mortgages are secured by standard charge.