Understanding Conventional vs. Collateral Mortgages in Canada

 
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When buying a home in Canada, you'll likely encounter two main mortgage options: conventional and collateral.

While both secure your loan with your property, they differ in how they handle future borrowing and the ease of discharging the mortgage from your title.

Conventional Mortgages: Simpler and More Transparent

A conventional mortgage is a straightforward loan agreement secured by your property. The amount registered on the title reflects the exact sum you borrow.

This offers transparency: you know precisely how much you owe and what gets secured against your home.

If you need additional funds in the future, you'll need a separate loan product, keeping your mortgage separate from other debts.

Collateral Mortgages: Flexibility with Potential Costs

A collateral mortgage, also known as a "pledge," acts like an umbrella. It secures your initial mortgage amount and allows the lender to include future debts you might incur up to a pre-determined limit (often 125% of the original mortgage value).

This flexibility can be appealing if you anticipate needing a line of credit or further loans secured by your property.

However, there's a potential downside:

  • Discharge Costs: Discharging a collateral mortgage can be more complex and expensive than a conventional one. Because it encompasses multiple potential debts, the lender needs to ensure all are settled before releasing their claim on your property. This can involve additional legal fees and administrative costs.

  • Refinancing Challenges: If you want to refinance your mortgage with a different lender in the future, discharging the collateral mortgage might be necessary. This can add time and expense to the process compared to a conventional mortgage.

Choosing Between Conventional and Collateral

A conventional mortgage might be ideal if you prefer transparency and anticipate keeping your mortgage separate from other debts.

A collateral mortgage could offer flexibility if you foresee needing additional loans secured by your property. However, be aware of the potential for higher discharge costs when you eventually pay off the mortgage or want to switch lenders.

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