Is This a Collateral Charge Mortgage?
January 30, 2017 | Posted by: Alison MacKenzie
Its no secret that lenders want to retain their mortgage clients. Over the last few years, one of the ways that certain banks have retained their clients is through the use of collateral charge mortgages. So what is a collateral charge mortgage and why should you care?
Collateral charge mortgages are registered against the title of your home for the value or more than the value that you want to borrow. They are often positioned as helping the client to access home equity money later on through the mortgage term (subject to approval). These mortgages limit your options by making it more difficult to switch lenders (ie negotiate the best rates) at renewal time. To get out of a collateral charge mortgage, at renewal, you will need to get a new mortgage and pay legal fees. These mortgages are very difficult to get second mortgages on and the lender may be able to seize your home equity to cover other debts with that same lender. A collateral charge mortgage ties you to your lender.
HELOC mortgages are often collateral charge as well, and can beneficial if you need access to funds throughout your mortgage term. Be aware that you will pay a higher interest rate for this flexibility, so in many cases it makes more sense to refinance a standard mortgage to free up money at a lower rate.
Standard charge mortgages are the best way to keep your options open. They allow you to easily and cost effectively move to a new lender at renewal and give you have the option of a second mortgage or line of credit. They are available through most banks and monoline lenders.
No matter which type of mortgage you choose, make sure you are informed. Ask if you're getting a collateral charge mortgage before you sign.