Most mortgage shoppers will ask about rates, terms, mortgage payments, prepayments, etc. Most people would not know to ask if their mortgage is going to be a conventional or collateral mortgage.
Many people don’t know the difference between the two. You could end up with a collateral mortgage from your bank and not even know it? It is usually in the fine print and many times the banker does not understand or will not disclose it to you. Not knowing the difference between the two mortgages can become expensive for you. You want to not only know the difference between the two products, but you want to have a choice of products. Most people when they ask for a $300,000.00 mortgage believe that that is the amount that the bank would register on title. This is not what happens when the banker registers their collateral mortgages.
A collateral mortgage registered on your home is usually for a larger amount than you asked for. If you asked for a $300,000.00 mortgage, the banker can choose to register $350,000.00 or $450,000.00! The amount registered can be 100% to 125% of the house value! This allows you to borrow, at a later date, the extra funds based on the bank’s current lending criteria, your ability to repay the mortgage. The banker will tell you that this will save you money and it is for your benefit; it is what they don’t tell you that can cost you money and hassles.
Beware of What The Banker Does Not Tell You!
They won’t tell you that you cannot transfer your mortgage to another lender on the maturity date for FREE. You could pay the mortgage at maturity from another lender but it would likely cost you close to $1,000.00. This means you are married to the bank regardless of what their renewal rate is! There would likely be lower rates available, (there usually are), but you can’t do a FREE TRANSFER if you have a collateral mortgage.
Would you agree that this is why many of the major banks are switching to collateral mortgages?
The bank may also use the collateral mortgage to offset other mortgage debt, your car loan, credit card debt, or line of credit.
If your banker declines an increase of funds to you at a later date you can’t do anything about it. You would have to pay the bank in full plus penalties & legal fees. You cannot put a second mortgage behind the bank’s mortgage because the bank has registered 100%-125% of the property value. You think you have equity but you don’t!
Risks & Costs
We see clients all the time that have gone back to their bank to borrow more money on their home and they are declined for the increase. So they ask us for a small second mortgage. We cannot help them unless we pay their bank’s mortgage in full. No one can help them because their bank has a mortgage registered on title for 100%-125% of the house value. Now they have legal fees, discharge fees & potential penalties.
You may decide you want a collateral mortgage but we think most people want to have choices.
The best advice is asking the question up front to your broker or banker and make sure you know what you are signing up for. Not knowing could end up costing you thousands of dollars.
Our clients have the options explained to them up front and they choose what they want, not what some banker is selling. At many of the banks now you don’t have any options, other than their collateral mortgage.
Call us for more information on this or any other mortgage questions you have at 613-563-3447.
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