Broadly speaking, there are two types of mortgages: standard charges and collateral charges.
Think of a standard charge as just a regular old mortgage.
A collateral charge is different, however, because it lets you re-borrow more money—using the equity in your home—without having to refinance the mortgage. Virtually all secured lines of credit (a.k.a. HELOCs) and readvanceable mortgages are collateral charges. Avoiding refinancing saves you lawyer fees (roughly $750 or so).
The tradeoff of a collateral charge is that you need to refinance to switch lenders whereas a standard charge can be transferred (“switched” to a new lender with no legal or appraisal fees). Some lenders will pay your legal fees to get you as a new customer, even with a collateral charge, but their rates are usually higher.
Here are some quick rules of thumb to summarize…
Choose a standard charge (regular mortgage) when:
- You know for a fact you won’t need to borrow more during the term of your mortgage
Choose a collateral charge when:
- You think you might need to borrow more, but you don’t know when
- You want a secured line of credit with your mortgage (for emergency funds, future renovations, investing, etc.)
- You want a hybrid mortgage rate (most are collateral charges)
Other points to keep in mind:
- Many people who don’t expect to refinance end up doing so
- You generally can’t get a second mortgage if you have a collateral charge (but second mortgages are expensive anyways)
- Some lenders register their collateral charges for more than the value of the home. That way, if the home value rises, you can borrow more at that time.
- You can never borrow more than 80% of your current home value regardless
- Some lenders, like TD Canada Trust, Tangerine and many credit unions, sell all of their new mortgages as collateral charges
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