When you purchase a home there are two ways that the lender can register your property as security for repayment – standard charge and collateral charge. This is registered through the province’s land registry office and secures the loan to your property while providing the lender certain rights as it relates to the terms of your agreement.
What is a standard charge?
A standard charge includes the details of your mortgage such as the term, rate, payments and amortization. A standard charge only registers and secures the amount of the mortgage itself.
For example: If you purchase a home for $250,000 and make a $50,000 down payment, only $200,000 would be registered as a standard charge.
What is a collateral charge?
With a collateral charge mortgage, you have the ability to pull equity out of your home throughout the term of your mortgage and it is referred to as readvaceable. You are able to apply to pull funds from your lender without having to refinance. Where standard charge mortgages are registered for the actual mortgage amount, collateral charge mortgage are registered for a
higher amount, generally between 100% and 125% of the overall value of the property.
For example: If you purchase a home for $250,000 and have $50,000 down payment. Your home can be registered as a collateral charge for up to $312,500.
Downside of a standard charge?
You have to refinance in order to access equity from your home which generally incurs legal fees. Also if you would like to access funds midterm, you will have to break your existing mortgage and pay the penalty.
Upside of a standard charge?
It is easier to switch mortgage providers when your existing mortgage comes up for renewal without incurring legal fees,
Downside of a collateral charge?
It is more costly to switch a collateral charge when your mortgage comes up for renewal as there are greater legal costs associated with it. The lenders generally compensate for this by offering a higher rate on these transfers.
Upside of a collateral charge?
You are able to access 80% of the value
of your home throughout your mortgage term.
As you can see there are advantages to both. Your mortgage professional should asses your current situation and future goals and provide feedback on these different charges.