Collateral Mortgages in Canada: All You Need to Know
What You Should Know
- A collateral mortgage allows you to continuously borrow from home equity increases.
- Think of it as a loan with a credit limit that potentially increases every year.
- There are no withdrawal costs, and you only pay interest on the amount you withdraw.
- However, there are costs between $2,400 to $9,000 for switching to another lender.
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.
The Costs of Switching Collateral Mortgage Lenders
Collateral mortgages can only be “discharged” from your lender. This means you are essentially cancelling the mortgage and paying it with money from another lender. It is not a simple transfer, as with standard mortgages. There are three types of fees you’ll need to pay for discharging your mortgage. In general, you can expect to pay between $2,400 to $9,000 for switching lenders.
- Discharge fees: Some provinces have a limit on the fee. This administrative fee ranges from $0 to $400.
- Legal fees: You can expect to pay between $400 and $2,500.
- Penalty fees: There are many variables, and the best solution is to use a mortgage penalty calculator. In general, you can expect to pay a penalty of $2,000 to $6,000. You should only consider switching if you can change to a lower interest rate mortgage.
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.
Comparing Lending Options
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How to Calculate your Collateral Mortgage
There are three steps to determine how much you can borrow from a collateral mortgage. In this scenario, imagine you purchase a $600,000 home. You pay a 25% down payment ($150,000) at the time of purchase. This means you have a 75% loan to value and the bank has lent you $450,000. The next steps will use this scenario as an example of calculating your collateral mortgage.
Step One: Determine Maximum Lifetime Borrowing
The first step is for your mortgage lender to determine the maximum amount you can borrow from this property throughout your mortgage. This is not how much you can borrow right away, but the total maximum amount your lender will allow you to borrow. This means that no matter how much your home value increases, this is the limit from your mortgage lender. Most lenders will calculate this limit by multiplying your home value by 125%, or 1.25x. In our example, with the $600,000 home, your lifetime maximum for this property would be $750,000. This means if your home’s value increased to $1,000,000 after 25 years, you’d only be able to borrow $750,000. This is not the amount you can borrow immediately. The amount you can withdraw is limited by your home equity and is explained in more detail in the next step.
Step Two: Limit Based on Home Equity
As stated previously, you can’t withdraw the $750,000 immediately. It is merely a maximum amount. Your mortgage lender will only allow you to withdraw a maximum of 80% loan to value. In our scenario, you initially had a 25% down payment, meaning your bank has lent you 75% of your home's value.
As a result, you can withdraw 5% of the home value immediately, or $30,000. There are no additional fees for withdrawing this amount, and you won’t be charged interest on any amount you don’t withdraw. If you withdraw from your home equity, you will be charged interest.
Over time, your home equity will increase due to mortgage payments and property value increases. This means the amount you can withdraw from your home automatically increases. The maximum amount you can borrow against your home is 80%.
Step Three: Subtract Mortgage Balance
Now that you know your loan to value limit (80%), the final step is to subtract the principal still owed on your mortgage. The best way is to use a mortgage amortization calculator which will let you know. For example, after 88 months of mortgage payments on the $450,000 mortgage the balance would be around $350,826 (assuming a 3% interest rate). If the home value increased to $700,000 you can determine the amount you can borrow in two steps.
- $700,000 home value times 80% Loan to value (explained in step two) = $560,000
- $560,000 home equity limit subtract $350,826 mortgage balance = $209,174
Therefore after 88 months, you would be eligible for a loan of $209,174. Now that you understand how to calculate a collateral mortgage, the next step is to figure out how to get one. The section below shows you where to get a collateral mortgage in Canada.
Collateral Mortgage Lenders
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 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
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
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
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’s All-in-One program allows you to consolidate debts at a fixed or variable mortgage 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.