When you get a residential mortgage, your lender will register the mortgage against your property – often called registering a “charge” or “lien”. This gives the lender the right to take possession of your home if the loan is not repaid as scheduled. How your mortgage is registered can impact your renewal options, and future borrowing capacity.
The standard charge mortgage:
With a standard charge, your lender will register your home with the land title or registry office in your municipality. This means your mortgage can be registered, transferred or discharged from your lender.
When your mortgage comes up for renewal, you have the option to renew with your current lender or switch to a new lender without incurring any legal fees. Legal fees range between $600 and $1,000, depending on your service provider. You’ll also have the ability to “shop” the best rate across a variety of lenders, meaning you have rate negotiating power at renewal time.
Standard charges are registered for the actual amount of the loan. Here’s how they work.
If you borrow $240,000 through a standard charge mortgage to purchase a home that costs $300,000, the lender will register the mortgage for the actual amount of the loan, $240,000. This is because the other $60,000 comprises your non-borrowed down payment. If you want to borrow more money against the property (more than $240,000), you will typically need to enter into a new mortgage agreement.
Pros of a standard mortgage renewal:
- The flexibility at renewal time to switch lenders and negotiate the best possible interest rate and best product options (prepayment privileges, etc.)
- No legal fees incurred to renew or switch lenders at renewal
- The ability to have a second mortgage (ex: a home equity line of credit) registered behind the standard mortgage
Cons of a standard mortgage renewal:
- You’ll have to requalify to borrow additional money against the property in the future and cover the legal fees (ex: if you wanted to refinance)
A collateral mortgage is a re–advanceable mortgage product, meaning that your lender can lend you more money as your property value increases without having to refinance your mortgage. This is because the additional amount you want to borrow is secured by the existing collateral charge. Collateral charges can be registered at 100%-125% of the value of the home.
Here’s an example:
You purchased a home that costs $300,000 but you only need a loan for $225,000. Rather than register your mortgage for the amount you borrowed (which in this case would be 75%) your lender registers it for 125% – or $375,000.
This means you can borrow the additional $150,000 in funds at any time, without having to refinance your mortgage. You’ll also be able to avoid the legal fees incurred during a refinance, but it’s important to weigh the pros against the cons.
Pros of a collateral charge:
- The flexibility to borrow money from your home in the future (up to the registered amount of your mortgage) if you qualify
- The ability to avoid the legal costs associated with refinancing
Cons of a collateral charge:
- The fact that, on paper, it could look like you have more debt than you do (By having a larger amount registered, you may have a tough time securing secondary financing for other things…for example, if your current lender were to decline your application for a refinance it is nearly impossible to approach another lender)
- The lender may utilise the collateral mortgage to pay any unpaid debts you may have with them. For example, if you defaulted on a credit card the lender could increase your collateral mortgage amount to payout the debt
- You’ll need to pay legal fees if you switch to another lender (even if your mortgage is up for renewal) as a collateral mortgage can’t be “switched”
Our team is here to help you understand your options, and how the registration of your mortgage can impact your future borrowing capacity.
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