What are collateral charges

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What are collateral charges

Recently collateral charges have been making news in the mortgage world and not in a positive way. We have seen reports in both newspapers and television shows warning consumers about the dangers of collateral charges. While there is some truth to parts of these reports, they leave out half of the story. In this article we discuss what a collateral charge is and it’s positive and negative features in relation to regular amortized mortgages.

First of all, a collateral charge is basically a re-advanceable mortgage. What this means is that the mortgage can be advanced to you over and over again without incurring any further legal fees. Sometimes lenders will register the collateral charge for a specific amount such as $300,000. This means that you can borrow up to this amount, assuming you qualify and the property is worth enough, whenever you like without paying legal fees again. In other instances, lenders won’t register a specific amount but will register for a blank amount meaning that the amount borrowed can be unlimited, depending on what you qualify for and what mortgage the property can support.

From a borrowers prospective, the advantage is being able to save legal fees every time you want to borrow more money against your property. This of course assumes that you decide to stay with the same lender over the life of your mortgage.

The disadvantage to a collateral charge comes into play when you want to move your mortgage to another lender. There are two basic ways to move your mortgage from one lender to another. The first is called a transfer. This is where a new lender takes over all the existing mortgage terms of your current lender and moves the mortgage over without charging you any legal fees. Of course you may still have a penalty to pay out your current lender. Most lenders will not transfer mortgages that are registered as a collateral charge. There are a few that will but most won’t.

However, there is another way to move a mortgage from one lender to another and this is called a refinance. Lenders will allow you to do a refinance which, rather than them taking over the existing mortgage terms, they register a brand new mortgage against your property. In these situations they don’t always cover the legal fees which can usually cost around $600. Given the competitive mortgage market there are usually some lenders willing to cover these costs. So in the case where a lender won’t do a transfer, there is most often the option of a refinance if you want to move your mortgage.

Rather than having a collateral charge you may end up with a plain old amortized mortgage. With this mortgage the advantages/disadvantages are the opposite. The mortgage is not re-advanceable meaning if you want to borrow more money you have to pay legal fees every time. However if you want to move it to another lender, it pretty much can be transferred without issues in almost all situations and doesn’t have to be refinanced incurring legal fees.

The main myth these recent reports were explaining about collateral charges was that the mortgage cannot be moved to another lender. Well this just isn’t true. The mortgage can be moved to another lender. It just may not occur as a transfer but rather may have to be done as a refinance.

Important Reminder Regarding Your Mortgage Renewal

If your mortgage is up for renewal and you are being contacted by your lender to early renew before the maturity date please call or email us before signing the renewal. We are able to give you a quick recap of rates in the market to make sure you aren’t signing for a rate/term that isn’t beneficial for you. Often times your lender will tell you that you only have a very limited time to sign the renewal to pressure you into taking the rate they want. Get in touch with us for a quick 2nd opinion!

If you require any further information regarding this article or any other mortgage matters please contact our office at 604‐556‐3893. Also, as a reminder to anyone looking for a mortgage, we offer 4 month pre-approvals at no cost to you. This means that you can get a rate hold for up to 4 months to protect yourself in case rates rise.

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About the Author:

Alex Kotai
Alex Kotai has worked in the mortgage lending business for over 10 years. His career started at HSBC Bank Canada where he spent most of his time in senior management roles which involved training and managing the sales staff at his branch. After leaving HSBC, Alex decided to open his own mortgage brokerage firm, Your Mortgage Source. Through his company, Alex has access to many lenders across the country with a very expansive list of products.