Since an increasing number of lenders are moving toward collateral mortgages, it has never been more important to understand their differences.
The primary difference is that a collateral mortgage registers the mortgage for more money than you require at closing. For instance, up to 125% of the value of the home at closing with TD Canada Trust or 100% at ING Direct and many credit unions instead of the amount you need to close the transaction.
The major downside to a collateral mortgage becomes evident at renewal time. For borrowers who want to keep their options open at maturity and have negotiating power with their lender, this isn't the best product as these mortgages are difficult to transfer from one lender to another. You have to start from the beginning with re-qualification and pay new legal fees. With a standard mortgage the new lender will often cover the costs of transfering under a 'straight switch' in order to earn your business. It could also be difficult to obtain a second mortgage or a home equity line of credit unless the home significantly appreciates in value.
Lenders offering collateral mortgages promote the benefit that it makes it easier and more cost effective to tap into your equity for such things as debt consolidation, renovations or property investment. There's no need to visit a lawyer and pay legal fees, the money is available as your mortgae is paid down.