The Ins and Outs of Collateral Mortgages
A lender can register a mortgage loan in two ways, through a mortgage charge or a collateral charge. The most common is with a mortgage charge where the lender will register your property with the land title or registry office in your city. The mortgage can then be registered, transferred or discharged from the lender.
The 2nd way, a collateral charge, can only be registered or discharged (not transferred) from your lender. Collateral mortgages make sense when you think you’ll need to borrow more money during the term of your mortgage.
A collateral mortgage is a re-advanceable mortgage product, which means your lender can provide you more money as the value of your property increases without having to refinance the mortgage. The lender will register your home with a collateral charge like they do for home equity lines of credit, and they can do this for a higher amount than the mortgage loan amount you require.
By registering the property with a collateral charge, you can borrow money from your property at any time, without having to refinance your mortgage. It makes future borrowing from the lender easier and cheaper since you don’t require a real estate lawyer thus saving on the legal fees which can be $1,500 – $2,000.
The benefits of a collateral mortgage are:
- The flexibility to borrow money from your home at any time, and
- The ability to avoid the legal costs associated with refinancing
The cons of a collateral mortgage are:
- The need to pay for legal fees if you switch to another lender, even at the end of your term
- On paper, given that a larger amount is registered for the mortgage, it could look like you have more debt than you actually have thus making it challenging to secure secondary financing for other things
A collateral mortgage, such as TD will provide you with an option to register your mortgage for the actual mortgage amount OR for up to 125% of the value of the property.
For example: If you purchased a home for $500,000, after you put 20% down ($100,000), you would require a $400,000 mortgage loan. Below is an example of the maximum amount a lender may be able to register under a collateral mortgage.
STEP 1: Determine registered home value with a collateral charge mortgage
$500,000 home value x 125% max loan-to-value ratio = Max registered home value: $625,000
Not all lenders will register your mortgage for more than your original mortgage amount (in this case: $400,000), but some can and do. For those that do, if the value of your property goes up (Let’s say to $550,000), you could borrow up to 80% of the new appraised value – minus what you still owe on your mortgage – without having to refinance your mortgage. If you still owed $300,000 on your mortgage, you would calculate your available equity as:
Step 2: Determine available equity
$550,000 (home value) x 80% (max loan-to-value ratio) = $440,000 – $300,000 (amount owing) = Available equity: $140,000
One thing to keep in mind is that no, matter how much the value of your home goes up to, the most equity you can ever access is the same amount your collateral mortgage was originally registered for. In this case the collateral mortgage was registered for $400,000. So even though you have $140,000 available equity, you could only borrow an additional $100,000 to bring the mortgage back up to the original $400,000.
If they were to have registered the mortgage up to the 125% which was $625,000 and you wanted to access the full amount, the value of your home would have to go up to $781,250 ($781,250 x 80% = $625,000) and you would have to owe nothing on your mortgage ($625,000 – 0 = $625,000).
Either way, now matter how your mortgage is registered for, a collateral mortgage is a re-advanceable mortgage product that lets you borrow equity from your home in the future.
Should you ever have any questions about your current mortgage, don’t hesitate to reach out for a strategy call.