Definition: A collateral charge is a method of securing a mortgage or loan against your property, offering unique flexibility compared to a standard mortgage. Unlike a traditional mortgage, a collateral charge is “readvanceable,” meaning the lender can extend more funds after closing without requiring a full refinancing process or lawyer involvement. However, a collateral charge is also non-transferable—it cannot be switched to a new lender at renewal without refinancing, which can involve legal fees.
Key features of a collateral charge
- Readvanceability: Allows the lender to lend more money in the future without refinancing. This can be useful for borrowers seeking additional funds, as it eliminates the need for reapplying and legal costs.
- Non-transferability: Borrowers cannot transfer (or “assign”) a collateral charge to a new lender, making it more costly to switch lenders at renewal since refinancing will be required.
- Terms and transparency: Unlike standard mortgages where key terms are registered with a provincial land title office, a collateral mortgage’s terms are embedded within a private loan agreement. Other lenders may be unable to view these terms or may find them objectionable, often discouraging them from taking on a borrower with an existing collateral charge.
Potential considerations
Collateral charges allow lenders flexibility, such as adjusting interest rates, increasing loan amounts, or applying mortgage payments toward other outstanding debts if the borrower defaults. This added control can benefit certain borrowers but may be a disadvantage for those who value the freedom to switch lenders without additional costs.
Borrowers interested in a collateral charge should consult a mortgage professional to understand how this structure might impact their long-term financing needs and potential costs.
Last modified: November 5, 2024
