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.