All You Need to Know About Collateral Mortgages in Canada

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A collateral mortgage is a type of readvanceable mortgage, meaning that you can borrow more money as you pay down your mortgage or if your home value rises. In order to do this, your lender will use your home equity as a collateral asset against your line of credit. As your home equity increases, your lender can extend more credit through a Home Equity Line of Credit (HELOC). This differs from conventional mortgages where you would need to refinance your mortgage in order to borrow more money from your lender.

Another difference is that a collateral mortgage is a loan that is not registered at your municipal registry office, which means it cannot be discharged or transferred to a different lender. If you were to refinance with another lender, you would have to pay legal fees to discharge and register your mortgage. In addition, your lender can require you to pay off any loans secured on your collateralized mortgage first. In contrast, a conventional mortgage charge can be directly transferred to other lenders.

Benefits vs Risks

Benefits of a Collateral Mortgage

  • Flexibility to be access money from your home equity without refinancing or legal costs
  • You can access more money if your home value rises, such as through a renovation

Risks of a Collateral Mortgage

  • A harder time switching lenders, including costly legal fees to break the mortgage agreement even when your mortgage term is finished
  • If you consolidate other unsecured debts (e.g. credit card debt) into your HELOC or mortgage, you can put yourself at a greater risk of losing your home if you fail to meet the additional payments

Example: $600K Home Collateral Mortgage

You have a $600,000 house that you are buying using a collateral mortgage. You pay 25% down ($150,000) at the time of purchase. Your lender registers your home for 125% of the purchase price, meaning that if your home value rises, you will be able to access equity for up to 125% of the current value ($750,000).

The loan-to-value ratio allowed on your home is 80%, meaning that at any time you are able to borrow 80% of your appraised home value, minus the money you owe on it. At the time of purchase, since 80% of your home value is $480,000, and the money you owe on the home is $450,000, this means you are able to access $30,000 in home equity immediately.

Years later, you pay off $100,000 on your mortgage, and your home value rises to $700,000. Since you are able to borrow up to an LTV of 80%, you're eligible to access up to $560,000. With your mortgage of $350,000, this leaves you with $210,000 available for your HELOC.

Because your home was registered for $750,000 only, the maximum you would be able to borrow at any time would be $750,000, even if you pay off your original mortgage and your home price increases.

Collateral Mortgage Lenders

RBC
RBC Royal Bank

The RBC Homeline Plan is a line of credit that allows you to consolidate your debts under a low interest rate. You can choose to borrow at either a fixed and variable rate.

TD
TD Bank

TD Home Equity FlexLine is a collateral mortgage that has two parts, a standard mortgage term and a HELOC, which you are able to take out at a variable interest rate based on TD’s prime rate. As you pay off more of your mortgage term portion, it will unlock more equity for your HELOC to draw from.

CIBC
CIBC

The CIBC Home Power Plan is a collateral mortgage that acts as a HELOC where you unlock more credit as you pay off your mortgage. You can borrow as little as $10,000 and up to 80% of your home's equity.

BMO
BMO

The BMO Homeowner ReadiLine program is a collateral mortgage that allows you to borrow up to 80% of your home equity. If you borrow more than 65%, you will have to pay in amortizing installments (interest + principal). Every term payment towards your mortgage will increase your HELOC credit limit.

Scotiabank
Scotiabank

The Scotia Total Equity Plan (STEP) lets you link all your products, including your mortgage, credit cards, personal loans, and line of credit. Your credit limit under STEP will automatically increase as you pay down your mortgage.

National Bank
National Bank

National Bank’s All-in-One program allows you to consolidate debts at a fixed or variable rate. As you pay down your mortgage, your line of credit’s credit limit will automatically increase. A monthly fee of $7 applies for each account.

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