When a homeowner chooses to take out a mortgage, they are essentially putting their home up as collateral for the loan. This can be a costly decision. This is because mortgage lenders typically require a higher down payment in the form of equity than they would for a loan where the borrower didn’t have a piece of property to put up as a guarantee.
Depending on how you (working with your lender) structure your mortgage, there are two types of charges lenders use to document the security for a mortgage loan. These are a Canadian Standard Charge (also referred to as a traditional, conventional, or non-collateral charge), or a Collateral Mortgage Charge.
A Canadian standard mortgage is a type of mortgage where the interest rate of your loan is calculated based on the current interest rates in the market. This means that if current interest rates drop, so will your mortgage rate. However, if interest rates increase, your rate may also increase,
On the other hand, a collateral mortgage charge is a type of mortgage that is secured by your house. This type of mortgage means that your home will be put up as collateral if you don’t make your payments on time. For example, if you default on your mortgage, the bank has the right to sell your property to recover their losses. The terms of this type of mortgage are determined by the terms of your original mortgage agreement.
Another difference between a Canadian standard and a collateral mortgage charge is that your credit score plays less of a role in qualifying for a mortgage with a collateral mortgage charge. This is because the lender isn’t concerned with your ability to repay the loan, but with the security of your home. This means that you don’t have to have a particularly high credit score to qualify for a collateral mortgage charge, which is an attractive feature to many people. However, while credit may play less of a role when it comes to applying for a collateral mortgage charge, it is still important to have a good credit score to ensure that you will be able to repay the loan in the future. Keep in mind that banks will carefully review your credit report before deciding whether to approve your application.
In addition, a Canadian standard mortgage can be flexible in terms of paying back the loan and may also be adjustable with the changing market and financial situation of the country. This helps lower the rate of payment or find easier ways to pay the mortgage, like increasing the term of a mortgage to lower the rate of payment. This is unlike collateral mortgages, which are more secure and limit the ability to change the terms of the loan except for extending the term of the loan to reduce the monthly payments.
Where do you go from here?
Before agreeing to a specific type of mortgage, it’s essential that you seek independent advice, especially if you are not entirely sure about how the terms and conditions of mortgages work. This will allow you to make a sounder decision given the fact that you’ll be bound by the terms and conditions of your mortgage for many years to come.