Collateral
Charge
A
collateral charge is basically a different method of securing a mortgage or
loan against your property.
It
differs from a standard (traditional) mortgage in some very important ways:
- Unlike a standard mortgage, a collateral charge is readvanceable — That means the lender can lend you more money after closing without you needing to refinance and pay a lawyer.
- A collateral charge is non-transferable — It cannot be assigned (switched) to a new lender like a regular mortgage.
In
addition, regular mortgages put all of their key terms in a document that's
registered with your provincial land title/registry office. A collateral
mortgage, however, puts key terms in a loan agreement and is not registered in
the same way.
That
collateral loan agreement may therefore contain terms that other lenders are
not aware of, or might find objectionable. For that and other reasons, lenders
don't accept transfers from borrowers with collateral charges. Instead, the
borrower must refinance in order to switch lenders, and that entails legal
costs.
Collateral
charges also allow lenders to do things like change your interest rate,
increase your loan amount, and use your mortgage payment to pay down other
debts you have with that lender (if you default on those debts).
If
you're considering a collateral charge, let me explain the
pros and cons before you jump in.
