Wednesday, May 4, 2011

What is a Collateral Mortgage?

Let’s first look at a regular mortgage. You will know what your interest rate will be for the term you have chosen. As well you will know what your payments will be how much you will have paid off at the end of the term. At the end of the term you are free to switch to another lender at generally no cost or a very small cost ($200) usually covered by the new lender or your broker. Also should you need extra money you are free to apply for an additional secured line of credit on your home.

Now a collateral mortgage is basically a line of credit against your home for up to 125%. So there is a lein against your home and you can no longer apply for additional credit from anywhere else except the bank that gave you the collateral mortgage in the first place. At signing time the bank will not recommend you receive legal counselling nor will they fully explain the disadvantages of a collateral mortgage. Then, if and when you decide to borrow up to 125% on the home you may not qualify and signed into the mortgage for no reason. Now this is where banks lock you up and basically through away the key on your finances, and leave you with no choices. Additionally this is how the banks are getting around the stricter guide lines the government has set up to avoid having a mortgage meltdown in Canada like the US.

Most lenders will not accept a transfer of a collateral mortgage and in order to get out of it you have to pay hefty fees. If you owe more than the guidelines set out by the government on your home you are stuck and cannot transfer anyway. At which point the banks can increase your interest rate to whatever they want knowing you are stuck with them. Now let’s say you wish to move? Umm, maybe you owe more on the home and cannot sell it, will the bank allow you to transfer the collateral mortgage to a new home? What if you missed a payment? You could be stuck and have a bank dictating to you what you can and can’t do, even where you wish to live.

Basically I am saying do not get a collateral mortgage, you are giving away your freedom. If you would like to read a little more, and see another scenario "click here".

If you currently have this type of mortgage it may be in your best interest to speak with a lawyer or mortgage professional to see if you can return to a normal mortgage.

If you have any questions or concerns, feel free to contact me.

Ron Miller
Butler Mortgages

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