Collateral Mortgages: What They Are and How They Work

If you are a new homeowner and you want to apply for a mortgage, you may notice that there is also something called a collateral mortgage. In short, banks register mortgages in two ways; either as a standard charge registered at the Land Title or the Land Registry Office, depending on the province you live in, or it can be registered as a collateral charge under the Personal Property Security Act. There are specific mortgage rates that apply to each type of mortgage, and this will depend on your specific contract as well as its terms and conditions.

What is a collateral mortgage?

When banks register a collateral mortgage, it basically means that you cannot simply switch or transfer your mortgage to another mortgage lender. You will need to discharge your mortgage at your current lender and apply for a new mortgage at a new lender. The mortgage has to be re-registered and this will cost just under $1,000. This means that collateral mortgages can be quite expensive if you want to change mortgage lenders and future.

If you have a standard mortgage, you can transfer your mortgage over to another mortgage lender, at a nominal cost of around $30. The lender will often cover this, which means that you are free to move to another lender and it will be much cheaper to do so.

Why banks register collateral mortgages

In short, they can make more money by registering a collateral mortgage for you. On top of that, banks often encourage you to register up to 125 percent of your current home’s value when you take out a mortgage at the bank. Their reasoning is that it will be cheaper for you to borrow money from them in the future, as the bond won’t be required to be re-registered.

The downside to this is that the collateral you’ve built-up in your home will be virtually worthless to another lender. This means that if you want to switch lenders, you will have to deregister your current bond and apply for a new bond with a new lender. By registering with the new lender, there is no guarantee that you will qualify at reduced rates since they will have to do a brand new application with your current financial situation, credit rating, and more.

If you need more information about collateral mortgages or want to determine what your specific mortgage rates will be, speak to us at Mortgage Guys. We are experienced mortgage brokers and can help you choose the right mortgage for your needs.