What are Standard and Collateral Mortgage Charges? Things to Know Before You Sign a Private Mortgage
When a borrower takes out residential mortgage, that real property provides the security for repayment of the loan. A borrower will need to sign a charge document for the lender establishing this security, and the lender will register this document with the land registry office within the province or territory where the property is. This charge document bestows several rights on the lender, such as the right to sell the property if a borrower fails to repay the loan according to the terms agreed.
A standard charge is registered on the property’s title in a document that has the basic terms of a loan. These include the principal, the interest rate, the payment amount and the term of the loan, among other things. Standard charges are registered for the dollar amount of the mortgage and just secure that one loan. If a property is valued at $600,000 and a loan is issued for $400,000 a standard charge secures the loan, the lender registers a standard charge for $400,000. If a borrower wants to refinance and take out more money, they have to go through the formality of paying off the first loan, discharging that standard charge, signing a new agreement for a new loan and registering the new charge on the property’s title.
With respect to bank-type financing; a standard charge is easier for a borrower to transfer from one lender to another, which means if a borrower reaches the end of a term and wants to move to a financial institution with a better rate, a borrower can generally do so without having to go through the registration process again. However, a borrower will face prepayment charges because they are technically paying off the whole note before maturity, depending on whether the mortgage was open or closed.
A collateral charge lets a borrower use a property as security on multiple loans. The lender might register this charge for a dollar amount that is higher than your first loan, so a borrower may be able to take out more money without having to go through charge registration again, so long as the total amount owed is not more than the original principal amount on the collateral charge. Let’s go back to the previous example, but let’s also say a borrower provides a $200,000 down on the house, leaving a principal of $400,000, but the charge was still for $450,000. A borrower can potentially borrow $50,000 more without having to register a new charge. The terms of this new mortgage would not be part of the title registry’s records on the property.
The convenience for the borrower is being able to borrow additional funds against the property without having to go through the registration process all over again. However, if a borrower wants to switch lenders at the end of a term, they would have to go through the process of registration all over again if the new lender will not accept the transfer. If the collateral charge also provides security for other debts to that first lender, you will have to satisfy those in full before that lender will transfer the charge or take that charge off the title.
Many of the Big Banks are issuing more Collateral mortgage, but they can restrict a property owner. Lenders always have to approve the additional funding. If they give a property owner a collateral mortgage and their situation negatively changes, it can be a cause for big problems. For example, if the income goes down, a property owner can end up in trouble and will be unable to access the equity in the property. For a lender, it provides a more options. Should a property owner default, a lender can proceed under the civil enforcement act and register a writ or opt for the standard foreclosure process.
At Amansad Financial, a collateral charge may be registered on a case-by-case basis to ensure an investors risk is minimized. At Amansad Financial, we look to ensure our investors feel safe with each investment opportunity.