Standard vs. Collateral Charge Mortgages: Pros and Cons
When it comes to securing a mortgage, homebuyers often encounter the terms "standard charge" and "collateral charge." These represent two distinct approaches to registering mortgages, each with its own set of advantages and disadvantages. In this blog post, we'll explore the differences between standard and collateral charge mortgages, shedding light on their pros and cons.
Standard Charge Mortgages:
Definition: Mortgages registered as standard charges are also known as traditional or conventional charges.
Registration Amount: Standard charges are registered for the actual amount of the mortgage.
Future Funding: If additional funds are needed in the future, re-qualification is required.
Lender Flexibility: Easier to switch to a different lender at the end of the term with no additional cost.
Limitations: The amount registered is fixed and cannot be exceeded without re-qualification.
Collateral Charge Mortgages:
Definition: Collateral charges, sometimes referred to as running accounts, allow your home to be used as security for a loan. They are typical with chartered banks and credit unions, and Monolines don't typically offer collateral charges (in some cases, they can).
Registration Amount: Lenders typically register collateral charges for up to 125% of the property value. You can also register the collateral charge at the same value of your mortgage.
Re-qualification Not Required: Additional funds can be borrowed without re-qualifying, providing flexibility.
HELOC Connection: Home Equity Lines of Credit (HELOCs) are normally registered as collateral charges.
Multiple Loans: Can be used to secure multiple loans with the same lender.
Re-advanceable Mortgages: Allows for a re-advanceable mortgage, where the HELOC grows with principal payments.
Flexibility: Offers flexibility for accessing additional funds in the future. You can continue using this charge until you’ve borrowed the full amount of the collateral charge, with no need for additional legal fees.
Drawbacks: Switching to a different lender incurs costs such as legal fees, discharge fees, and potential appraisal fees. Additionally, obtaining a second mortgage or a HELOC with another lender can be more challenging. Some lenders may cover the fees associated with removing a collateral charge, and others may allow you to capitalize a certain amount of fees when discharging the collateral charge into the mortgage.
Credit Card Risk: If you have a credit card with the same bank as your collateral charge mortgage, defaulting on the card may lead to collection from the mortgage.
Institutional Advice: Having all banking, credit, and loan needs with one institution may not be advisable.
Considerations and Conclusion:
In the mortgage landscape, choosing between a standard and collateral charge involves weighing the benefits against potential drawbacks. Collateral charges offer easier access to funds in the future, but they come with certain downsides. It's crucial for homebuyers to understand their financial goals and preferences before deciding which mortgage type aligns with their needs.