“Collateral” and “insured” describe two completely different features of a mortgage. A collateral mortgage concerns how the lender registers its security against your property. An insured mortgage concerns whether mortgage loan insurance protects the lender against losses if you default. A collateral mortgage uses a collateral charge registered against your property and may secure the mortgage plus other debt with the lender. An insured mortgage has mortgage loan insurance protecting the lender against borrower default. A mortgage can therefore be collateral and insured at the same time.
- Collateral and Insured Mortgages Are Not Opposite Categories
- How a Collateral Mortgage Works
- How an Insured Mortgage Works
- Can a Collateral Mortgage Also Be Insured?
- Does a Collateral Charge Make It Easier to Borrow More Later?
- What Happens If You Want to Switch Lenders?
- Which Difference Should You Pay Attention To?
- Questions About Collateral and Insured Mortgages
Collateral and Insured Mortgages Are Not Opposite Categories
The simplest distinction is what each term tells you.
| Feature | Collateral mortgage | Insured mortgage |
|---|---|---|
| Describes | How security is registered against the property | Whether the lender has mortgage loan insurance |
| Main purpose | Secures debt using the property | Protects the lender against losses from mortgage default |
| Connected to down payment? | Not inherently | Commonly required when down payment is below 20% |
| May involve an insurance premium? | Not because it is collateral | Yes |
| Can both apply to one mortgage? | Yes | Yes |
When mortgage security is registered as a collateral charge, the specific mortgage terms can be contained in a separate credit agreement rather than in the charge registered on title. A collateral charge may also secure other borrowing with that lender.
Insurance answers a different question. Mortgage loan insurance protects the lender if the borrower cannot make the required mortgage payments. For a home purchase with less than 20% down, this insurance is generally required.
How a Collateral Mortgage Works
A mortgage gives the lender security over the property. That security is registered against the property’s title through the applicable land registration system. A collateral charge is one method a lender can use for that registration.
One distinguishing feature is that a collateral charge can potentially secure more than the original mortgage. For example, a lender may structure it so that other borrowing can be secured under the same charge.
The registered amount can also exceed the mortgage balance. Tangerine, for example, states that its collateral-charge mortgages are registered for 100% of the property’s value. That does not mean the borrower owes the registered amount. Interest and repayment obligations relate to money actually borrowed.
This structure can make additional borrowing easier in some circumstances because sufficient security may already be registered. Additional credit is not automatic, however. You still need the lender to approve the new borrowing.
How an Insured Mortgage Works
An insured mortgage has mortgage default insurance behind it. The protection belongs to the lender, not the homeowner.
A buyer with less than 20% down generally needs this insurance. CMHC currently allows eligible insured financing of up to 95% of a home’s purchase price, subject to its eligibility and minimum down-payment requirements.
The lender arranges the insurance and pays the insurer’s premium, but the cost is typically passed on to the borrower. The premium can be paid upfront or added to the mortgage balance.
Under the current CMHC mortgage insurance premium schedule, standard homeowner premiums vary according to loan-to-value ratio. Adding the premium to the mortgage also means financing that amount rather than paying it immediately.
The relationship between insurance and equity is why an insured mortgage is more naturally compared with the distinctions covered in conventional vs. insured mortgages.
Can a Collateral Mortgage Also Be Insured?
It can. There is no contradiction between the two descriptions.
Imagine a buyer purchasing an eligible home with 10% down. The resulting mortgage is above 80% loan-to-value, so mortgage loan insurance would generally be required. If the lender also registers its security as a collateral charge, the same mortgage is both insured and collateral.
The insurance deals with the lender’s default risk. The collateral charge deals with the lender’s security over the property.
This also explains why the difference between a conventional and high-ratio mortgage should not be mixed with the distinction between standard and collateral charges. These labels classify different parts of the financing arrangement.
Does a Collateral Charge Make It Easier to Borrow More Later?
Potentially, but the registered charge itself does not give you an automatic right to additional money.
A collateral charge can provide room for future borrowing without necessarily registering another charge against the property. Tangerine, for example, explains that its structure can allow a home equity line of credit to be added under the existing charge without new legal registration costs, subject to approval under its credit criteria.
You still need to qualify for whatever additional credit you request. Having security already registered does not force the lender to approve another loan or line of credit.
This feature has nothing to do with mortgage default insurance. Insurance does not create additional borrowing capacity merely because the mortgage is insured.
What Happens If You Want to Switch Lenders?
The type of charge can become particularly important when you move your mortgage to another lender.
The federal mortgage-shopping guidance distinguishes standard and collateral charges and advises borrowers to ask lenders how the mortgage security will be registered before choosing a mortgage. Federal guidance on mortgage security registration explains that the two registration methods have different implications when dealing with the mortgage later.
A collateral charge may not transfer to another lender in the same manner as a standard charge. The existing charge may need to be discharged and a new one registered, which can introduce legal or registration costs. Tangerine specifically notes that transferring its collateral-charge mortgage to another lender involves refinancing through a lawyer and legal costs.
That potential switching issue belongs to the collateral side of the mortgage. Whether the mortgage is insured is a separate matter.
Which Difference Should You Pay Attention To?
Ask two separate questions before signing.
First, how will the mortgage be registered against the property? If it uses a collateral charge, understand what debts the charge can secure, the amount being registered and what would be required if you later switch lenders.
Second, is the mortgage insured? If mortgage loan insurance applies, determine the premium and whether it will be paid upfront or added to the mortgage.
Keeping those questions separate prevents the terminology from becoming confusing. “Collateral” tells you about the lender’s registered security. “Insured” tells you about protection against the lender’s loss if you default. Neither term tells you everything about the other.
Questions About Collateral and Insured Mortgages
Does a collateral mortgage require mortgage insurance?
Not because it is collateral. Mortgage insurance requirements depend on factors such as the loan-to-value ratio and the applicable insurance rules, while collateral describes how the lender’s security is registered.
Does registering a collateral charge mean you borrowed the full registered amount?
Not necessarily. A collateral charge can be registered for more than the initial amount borrowed. You owe the amounts actually advanced under the applicable credit agreements, not automatically the entire registered charge.
Can an uninsured mortgage have a collateral charge?
It can. Insurance status and charge registration are separate characteristics, so a lender can use collateral security even when mortgage default insurance does not apply.
Is mortgage loan insurance the same as mortgage life insurance?
It is not. Mortgage loan insurance protects the lender against default, whereas mortgage life insurance is an optional product associated with the borrower’s death.
