September 6, 2012
Collateral mortgages are done at banks. Though most bank reps will tell you all the benefits of having a collateral mortgage, but will avoid telling you the disadvantages. A collateral mortgage is basically a line of credit against your home for up to 125%. A lein is placed against your home and you can no longer apply for additional credit from anywhere else except the bank that gave you the collateral mortgage.
Should you decide to borrow up to 125% of your property, (assuming you qualify to get this. If you sign into a collateral mortgage, and fail to qualify for more money, you’ve signed into a contract in which you cannot have access to the only benefit.) when your mortgage matures, you might not be able to leave as other lenders will refuse to take your collateral mortgage amount. This means, you will be forced to accept the rate in which your lender/bank gives you at the time of renewal. They can increase the rate as they please.
If you pull out extra money and a few years down the road:
1) You want to move? If you owe more than what you can sell your property for… well, sorry you will have to pay the difference, which could be thousands!
2) Miss a mortgage payment? You will have the bank dictating to you what you can and cannot do..
You will be at the bank’s mercy. Giving away your freedom.
Not to mention, getting out of a collateral mortgage comes with hefty lawyer fees, more so than a simple standard mortgage.
A regular mortgager will allow you to know your interest rate for the duration of the mortgage, will have the same set payments and how much you will have paid off at the end of your term. You will then be free to switch to another lender and take advantage of shopping for a lower rate at no cost.
It is very scary how many people sign into collateral mortgages without even knowing it, and when it comes time to renew, there is not much we can do to help. They end up having to re-sign with their current lender and have a rate 1-3% higher than current rates.