A different kind of mortgage with unique pros and cons: find out if it’s right for you
A collateral charge mortgage is a very different kettle of fish; unlike a traditional mortgage, a collateral mortgage makes it easier to borrow against the property you’re buying without refinancing. The main advantage for many people is access to a home equity line of credit: the bank can ‘re-advance’ you cash after closing with your mortgage as collateral. This doesn’t require refinancing and you don’t have to pay a lawyer. Unlike a traditional mortgage, you can also get a collateral charge mortgage worth more than the current value of your home, 125% of its value in some cases. That’s the amount you can borrow against.
Let’s break it down. Say you’re buying a home worth $250,000. You make a 20% down payment of $50,000 and get a traditional mortgage for the remaining $200,000. The registered home value is still $250,000, but if you opt for a collateral charge mortgage instead you could end up with a boosted registered home value courtesy of your bank. If your bank registers your home value at 125%, that would mean $312,500 on the books. You can borrow up to 80% of this value ($250,000 in this case) minus what you still owe on the mortgage ($200,000). The end result - you get a line of credit worth $50,000.
That may sound good, but there are downsides to choosing a collateral charge mortgage over a traditional one. For starters, the mortgage is non-transferable. It can’t be moved to a new lender without paying hefty legal fees, even when your mortgage term is up. This takes some of your bargaining ability off the table; your lender knows if you don’t like the interest rate it’s offering, it’s going to cost you a lot of money to move.
Collateral charge mortgages allow lenders to change your interest rate after closing (for example, if you miss a payment). Your lender can also increase your loan amount and use your mortgage payment to pay down other debts you owe (if you default on payments). These things don’t happen in a traditional mortgage.
You should also be aware having a collateral mortgage means you may have more debt on paper than you do in reality (because your mortgage has been registered for an inflated amount). Good if you are borrowing against your mortgage, bad if you’re trying to secure a loan from another lender.
If you are in good financial position and you need access to cash for home improvements, business investments etc., having a collateral mortgage can be an easy way to get your hands on capital while buying your new home at the same time. It’s certainly not for everyone, so be sure to go over the pros and cons in detail before you opt for a collateral charge over a traditional mortgage.
Wondering if a collateral charge mortgage is for you and what options are out there? Contact an MA broker today.