July 6, 2015
It is important to be vigilant in guarding against bank representatives pushing collateral mortgages. As the name suggests, a collateral mortgage is effectively a line of credit against your home for up to an astounding 125%. In essence, with a collateral mortgage a lien is placed against your home preventing you from applying for further credit from another source other than the bank that initially lent you the money for your home.
The above scenario is rife with problems and characterized mostly by a relationship of authority and not synchronicity. Of course, in the case of a collateral mortgage your lender will not switch or transfer your mortgage over to another lender. In fact, if you want to change lenders you would be forced to discharge your mortgage and pay the fee to have your new mortgage registered. With a collateral mortgage it can thus be impossible to shop around and get the best rate available to you.
Another major pitfall of a collateral mortgage is that if you are looking to refinance your mortgage to consolidate debt, renovate or engage in another endeavor that would ultimately save you money, the options are limited. If your lender declined and decided not to approve the augmentation, you would still not be entitled to approach another lender. The reason for this is simple. If your lender has secured the home by way of a collateral mortgage, then there will be essentially no equity available to secure your loan request.
Perhaps one of the worst and most unpredictable elements of being entangled in a collateral mortgage involves legislation. Under Canadian law dealing with offsets lenders have the right to use a collateral mortgage to pay out any other unpaid debts you may have with them. Moreover, if you defaulted on another loan or credit card, lenders can increase your mortgage payments and pay out other creditors.
In conclusion, there remains only one point that needs to be driven home: by all means it is important to stick to a conventional mortgage and, again, avoid at all costs collateral mortgages! More than that even – and we speak on this often – it is imperative, as with every aspect of buying or selling a home, to do your homework. Read up on every possible item to do with your sale or purchase as is possible. That is one surefire way to secure a sound investment.