What is a Collateral Mortgage?

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A collateral charge mortgage, sometimes referred to as a readvanceable mortgage, is a type of mortgage where the lender registers 100% or more of the property value when securing the mortgage. This allows you to borrow more money in the future without your lender needing to register additional charges against the property.

For example, if your mortgage amount is $500,000, your lender might register 125% of the amount, a $625,000 mortgage, with the land registry or land title office. Having a larger amount registered doesn’t mean that you owe this larger amount. In this example, even though a $625,000 charge is registered on the property’s title, you currently only owe your lender $500,000.

Just because it has already been registered for a greater amount doesn’t mean you’re automatically approved to borrow more money in the future. Instead, it means that as you pay off your mortgage and your home equity increases, or as your property value increases, you can then borrow from your home equity using the same original charge when you got your mortgage, up to the amount registered. This makes it easier to borrow from your home equity, such as with a home equity line of credit (HELOC). You’ll still need to apply, and your lender still needs to approve your application.

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The most common types of loans that will have a collateral charge are readvanceable mortgages, which are mortgages with an attached home equity line of credit (HELOC). They’re called readvanceable because you can borrow more money as your home equity increases. Since your mortgage is already registered for a greater amount, your lender doesn’t need to register a new charge each time your home equity increases. Some readvanceable mortgage lenders might even automatically readvance by increasing your available credit at set time intervals.

A standard charge mortgage, sometimes called a conventional charge mortgage, registers all the specifications of your mortgage, including its principal amount. For example, if you borrowed a $500,000 mortgage, then your lender will register a $500,000 mortgage. This registration secures the loan amount, plus any unpaid interest and fees, minus any repaid principal. Should you wish to borrow more money in the future, your lender will need to register another charge for that amount. Mortgage registrations cost money and incur legal fees, and they also take time.

Most mortgages that you might see from most lenders are standard-charge mortgages, meaning they secure only the initial loan amount and any related fees, without the flexibility to increase the mortgage amount without a new registration.

The main benefit of a collateral charge mortgage is that your mortgage is already registered for a greater amount. If you want to borrow more money during your mortgage term, it’s easier for your lender to add other lending products secured by your home equity.

A drawback of collateral charge mortgages is that they’re harder to transfer to a new lender. This can make it more of a hassle to switch lenders, such as if you’ve found another lender offering a better mortgage rate. As you’re more likely to stay with your current lender, your lender might not be incentivized to offer the best possible renewal rate either. Another drawback is that the higher registered charge can make it more difficult to receive additional financing from other lenders, as your property is already being used at 100% or more to secure your collateral charge mortgage.

Some lenders might not even accept transfers of collateral mortgages. For example, you cannot transfer a collateral mortgage to Scotiabank. Instead, you’ll need to have the mortgage discharged by fully paying it off before being able to switch to Scotiabank.

Standard charge mortgages benefit from their ease of transferring between lenders. This means that you can switch mortgage lenders at the end of your term to those offering the best rates without incurring additional fees. While some lenders might cover charges associated with transferring a collateral charge mortgage, it isn’t always guaranteed. Having a lower amount registered can also make it easier to get additional financing elsewhere.