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What is a Standard Charge Mortgage vs a Collateral Charge Mortgage?

What is a Standard Charge Mortgage vs a Collateral Charge Mortgage?
Standard Charge Mortgage vs a Collateral Charge Mortgage

A mortgage is a loan that is secured by the property you are buying. The mortgage is registered as a ‘charge’ against the title of your property, which gives the lender the legal right to seize your property if you default on the terms of the mortgage.

There are two types of mortgage charges that can be registered against your property: standard charges (also called conventional, traditional or non-collateral charges) and collateral charges. In this article we’ll explain the difference between these two types of charges, outlining the pros and cons of each.

What is a Standard Charge Mortgage?

A standard charge mortgage is registered with the terms of the mortgage, such as the principal amount, interest rate, term and payment arrangements. Since the standard charge is registered for the exact amount of the mortgage, securing only that mortgage, if you want to borrow more money in the future, you will need to re-apply and qualify for a new loan, with all the associated costs.

What is a Collateral Charge Mortgage?

A collateral charge may be registered for the actual amount of the mortgage (similar to the standard charge), or up to the full amount of the value of your property plus 25%. Unlike the standard charge mortgage, a collateral charge can be registered with different terms than the mortgage loan agreement. These factors allow the flexibility to borrow more money in the future without all the associated legal costs (you would still need to apply and qualify). A collateral charge can be used to secure several loans — such as a line of credit or a car loan, if you wish, from the same lender.

All re-advanceable mortgages — meaning a mortgage that combines a mortgage with a revolving credit loan such as a HELOC, or a line of credit — use collateral charges. As you pay down your mortgage, the loan amount in your HELOC increases, and you can use that money, pay it back and borrow it again as many times as you need to.

Benefits of Standard Charges vs Collateral Charges

Each of these types of charges have their benefits, which we list below. One is more flexible in terms of switching lenders and the other allows more security.

Pros of Standard Charge Mortgages

  • Allows you to keep your options open since it is easier to switch mortgage lenders at the time of renewal if you’d like to take advantage of better terms and conditions elsewhere.
  • Allows the lender more flexibility with the terms and conditions when setting up the mortgage.
  • Some lenders still allow borrowing behind the standard change mortgage so you can take out equity or a second mortgage without the penalty for discharging the first mortgage. 

Pros of Collateral Charge Mortgages

  • Because it is re-advanceable, a collateral charge mortgage allows for flexibility in accessing funds without all the legal processes and costs of discharging your original mortgage.
  • A re-advanceable mortgage allows you to use the revolving credit portion (HELOC) however you wish, for example to increase your home’s equity through renovations, or to cover unexpected expenses, and so on.
  • A re-advanceable mortgage generally allows for the revolving credit portion to be switched, either fully or partially, to term loan (mortgage) if it is advantageous for you.

Disadvantages of Standard Charges vs Collateral Charges

Of course, there are disadvantages to each type of charge as well, mostly again related to flexibility.

Cons of Standard Charge Mortgages

  • Less flexible to borrow additional funds than with collateral charge mortgages

Cons of Collateral Charge Mortgages

  • Collateral charge mortgages can sometimes be more difficult to transfer to a different lender, at renewal time as not all lenders allow straight transfers which can limit your options.
  • With a collateral charge it could be difficult to obtain a second mortgage or HELOC (that wasn’t built in from the beginning), if the value of your home depreciates or doesn’t increase enough.
  • Can make it difficult to place a second mortgage behind it with a different lender due to how the 1st mortgage is registered, as it can be registered for up to 125% of the value.  For example, if your current 1st mortgage holder has declined you for additional funds and that same lender has registered a collateral charge say for 100% of the value of your property, a new lender will be very reluctant to register behind it and advance you the much needed funds. 
  • Collateral charge mortgages have higher fees to set up or to discharge as opposed to the standard charge mortgage

Which is Best For You: a Standard Charge Mortgage vs a Collateral Charge Mortgage?

The answer to that question mostly depends on how important flexibility is to you. If you value security over flexibility, a collateral charge mortgage will give you some peace of mind knowing that you can access funds. However, if you want to keep your options open, particularly if you think you might want to change lenders at renewal time, a standard charge mortgage would be a better choice for you.

Not sure? Give us a call and our experts can go over it with you!

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