Collateral vs Conventional Mortgages Explained

When you get a mortgage in Canada, your lender may register it as either a conventional mortgage or a collateral mortgage. While both secure your loan against your property, they work very differently and can significantly impact your options down the road.

What Makes Each Mortgage Type Different

A conventional mortgage registers your lender's security interest for the exact amount you borrowed. If you have a $400,000 mortgage, that's precisely what gets registered on your property title.

A collateral mortgage, on the other hand, typically registers for up to 125% of your home's value at the time of approval. This means if your home was worth $500,000, your lender might register a $625,000 charge even if you only borrowed $400,000. The higher registration creates a security blanket that may allow you to borrow additional funds later without re-registering the mortgage.

How Collateral Mortgages Affect Future Borrowing

The extra room built into a collateral mortgage registration can offer flexibility if you want to access more credit later. Your lender may be able to provide additional funds through a line of credit or increase your mortgage amount without going through a full refinancing process, depending on your equity position and creditworthiness.

However, this convenience comes with a significant trade-off. The higher registered amount can make it more difficult to add second mortgages or additional secured credit from other lenders, since your primary lender's charge takes up more of your available security.

Switching Lenders at Renewal Time

This is where the differences become most apparent. With a conventional mortgage, switching to a new lender at renewal is typically straightforward and inexpensive. Your new lender can usually take over the existing registration or discharge and re-register for a minimal fee.

Collateral mortgages require a full discharge and re-registration process when switching lenders, which can cost between $800 and $1,500 in legal and registration fees. This expense may offset some or all of the potential savings from switching to a lender offering better rates or terms.

Which Banks Use Each Type

Most traditional lenders, including major banks like RBC, TD, and BMO, offer both options but may default to collateral mortgages for certain products or customer segments. Some financial institutions have moved primarily to collateral mortgages for their flexibility in offering additional credit products.

Credit unions, alternative lenders, and mortgage finance companies more commonly use conventional mortgages. The type of registration isn't always clearly explained during the application process, so it's worth asking your lender directly which type they're using.

Making the Right Choice for Your Situation

Consider a collateral mortgage if you value the potential convenience of accessing additional credit from the same lender and don't anticipate switching lenders frequently. The built-in flexibility could be worthwhile if you're planning renovations or other major expenses that might require additional borrowing.

A conventional mortgage may be better if you want maximum flexibility to shop around at renewal time or if you might want to add other secured credit products from different lenders. The lower switching costs can make it easier to take advantage of competitive rates and terms from various lenders over time.

Key Takeaways

• Conventional mortgages register for the exact loan amount, while collateral mortgages typically register for up to 125% of home value
• Collateral mortgages may offer easier access to additional credit but make switching lenders more expensive
• Switching from a collateral mortgage costs $800-$1,500 in legal and registration fees
• Ask your lender which type they use, as it's not always clearly explained during applications
• Your choice should depend on whether you prioritize future borrowing flexibility or renewal shopping flexibility

Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or mortgage advice. Any numbers, rates, or scenarios mentioned are examples only and may not reflect current market conditions. Always consult a licensed mortgage professional or financial advisor for guidance specific to your situation. If you are looking for help with a mortgage, The Local Broker can connect you with a licensed professional.