Not a day goes by without receiving multiple calls from customers looking to renew their mortgage into a stellar rate. Invariably, we ask them if their current mortgage is registered as a standard charge or running account (commonly referred to as a collateral charge). Without fail, no one actually knows the answer to this question, nor do they have the slightest clue about what we’re talking about.
What is the difference? Why would anyone care?
Basically, a standard charge is transferrable to most lenders without a legal fee, while a collateral charge is not. With the latter of the two, you’ll be required to engage a lawyer to discharge the existing mortgage and register a new charge in its place. This can cost anywhere between $750 – 1,500 depending on what province your property is located in and what legal firm you’re working with. Understandably, this comes as a shock to most and potentially eliminates any renewal options outside of those offered by your current lender.
But my lender/broker never mentioned anything about that!
True. Unfortunately, this happens far too often. We’re sorry to be the bearer of bad news, but the best we can do is advise you as to whether or not it makes any financial sense to absorb the fee because your new rate will more than offset that legal cost through interest savings. If it’s nonsensical, then our advice will be to stay put.
How do I know what type of charge I have?
It’s registered in the legal document at land titles. If you kept your original paperwork, you’ll be able to find it there. If not, call customer service at your bank and ask. The only problem here is that the person on the other end will often have no idea what you’re talking about.
That sucks. Why would anyone want a collateral?
It’s not all bad. If you’re looking for the lowest rate on a mortgage and nothing more, then it’s beneficial to be registered as a standard charge. However, if you’re looking for something with some additional flexibility, then a collateral charge/running account could be suitable. This, however, will come at a marginally higher rate. For example, if you’re looking to combine a mortgage with a HELOC (home equity line of credit) that is structured in such a way that the amount available on the credit line increases as the principal is paid down on the mortgage portion, then you need to be registered collaterally. Similarly, in a collateral charge scenario, if it’s registered correctly, you have the ability to refinance your mortgage to borrow additional funds without incurring a legal cost.
At the end of the day, the mortgage rate is very important. We agree. However, it’s imperative that the fine print is understood as well. These seemingly insignificant details can eliminate any benefit to getting the lowest rate to begin with. Also, there are times when you may not have any choice in the matter. Every mortgage lender has different underwriting policies and your deal/lending profile may only be acceptable to a few lenders. If this is the case, then so be it.
