In British Columbia, under the Torrens systems of land title registration, all mortgages are registered as charges against the title of your property and are registered as either a standard charge or a collateral charge. Understanding the difference between the two charges will help you choose the product that aligns with your financial needs and goals.
With a standard charge, also referred to as a traditional or conventional charge, the specific details of the mortgage loan, such as principal amount, interest rate, term and payment are included in the charge. A standard charge is registered for the actual amount of the mortgage, securing only the one mortgage loan. For example, if you require $300,000 to purchase a home and the loan is secured by a standard charge the lender will register the liability on your property for $300,000.
On the mortgage renewal date other lenders will allow you to transfer or switch your mortgage to them at little or no cost to you. Switching to a new lender can save you money if the new lender is offering you a better interest rate. If you wish to borrow additional funds then you would have apply for a new mortgage loan and re-qualify based on the lender’s current criteria, the property value and your ability to repay the loan amount. You will also incur fees to discharge your existing standard charge and register a new charge for a higher amount.
With a collateral charge the lender may register the charge for more than the initial loan amount. This allows an individual to use their home as security for more than one loan. For example, if you require a mortgage loan of $240,000 to buy a home that costs $300,000 the lender may register the charge for $300,000 and you may be able to borrow an additional $60,000 in the future without having to register a new charge.
You must qualify for the additional funds and the amount borrowed cannot be more than the principal amount of the collateral charge. You should also be aware that if you have other loans or credit cards with that lender, and you default on your mortgage, the lender can assign these debts to the collateral charge, which means that those debts would be repaid from the proceeds of the sale of the home.
Another downside of collateral mortgages is that you may be limited if you wish to switch or transfer the mortgage as not all lenders will accept a transfer of a registered collateral charge. If the collateral charge does secure other debts (besides the original mortgage amount) these debts will have to be repaid before the transfer to the new lander can be completed.
With both standard and collateral mortgages, if you wish to prepay the mortgage before the maturity date there may also be prepayment charges. If you would like further information on standard or collateral mortgages or assistance with securing mortgage financing, please give us a call.