What is Collateral Mortgage?

When it comes to financing your home purchase, you may come across the term "collateral mortgages." In Canada, collateral mortgages are becoming increasingly popular among homebuyers. In this guide, we'll break down what collateral mortgages are and how they differ from traditional mortgages.

What is a Collateral Mortgage?

A collateral charge mortgage is a type of mortgage where the lender can register the mortgage for an amount higher than the actual loan amount. This allows the borrower to access additional funds in the future (up to the registered amount) without having to register another mortgage (saving legal fees).

Pros and Cons of Collateral Mortgages

Pros:

• Higher Registered Amount: Unlike a conventional mortgage where the registered amount matches the loan amount, with a collateral charge mortgage, the lender may register the mortgage for a higher amount, often up to 125% of the property's value. 
  
• Flexibility: This type of mortgage offers flexibility for borrowers because they can access additional funds later on, such as for renovations, without having to go through the legal process of registering a new mortgage or refinancing.

Cons:

• The lender has the option to utilize the collateral mortgage to settle any outstanding debts you owe them. For instance, if you have a credit card with the same lender, and if you were to default on a credit card payment, the lender could increase the amount of your collateral mortgage to cover the debt.
• In the event that you wish to refinance to tap into the equity you've accrued in your home, but your lender rejects your application due to poor credit or your income has decreased drastically, you may encounter difficulty obtaining a second mortgage from another lender. This is because your home is secured against the collateral mortgage, which appears to have exhausted the available equity making it challenging to secure additional funds in second position behind the existing 1st mortgage.

How to Qualify for a Collateral Mortgage

Qualifying for a collateral mortgage is similar to qualifying for a traditional mortgage. Lenders will look at your credit score, income, and overall financial situation to determine if you are eligible for this type of mortgage.

Feel free to email me at [email protected] to discuss whether collateral mortgage might be a good fit for you.