Financial Literacy - Understanding Collateral Mortgages
In the past, banks typically used conventional mortgages where they registered the mortgage against your property for the amount that you borrowed. If you wanted to increase your mortgage, they would have to register a new mortgage or an amending agreement.
The mortgage process is changing and many banks have are now using collateral mortgages when you purchase or refinance your home. A collateral mortgage typically designed to secure all obligations that you have to the bank and there is no dollar limit on the mortgage. If all you have at the bank is an amortizing mortgage loan then that is all it will secure. However, if you have a home equity loan, line of credit, credit cards and/or overdraft protection, all of this debt may also be secured by the collateral mortgage. Unfortunately, it is not always crystal clear which debts at the bank are secured by the mortgage and which are not and so it is up to you to understand this and have it in writing from the bank.
The advantage for you of the collateral mortgage is that it makes future borrowing cheaper as you can borrow additional funds from the same bank that are secured by your home without having to pay for a new mortgage to be registered. Also, interest rates for debts secured by a house are generally lower than rates for unsecured debts.
The disadvantage of the collateral mortgage is that other debts with that bank, such as lines of credit and credit cards, are secured by the mortgage and, if you experience financial difficulties and default on your line of credit or credit card payments, the bank could take action against your home to collect those debts. Also, if you want to switch banks to take advantage of better interest rates, you will have to pay to all of your debts secured by the collateral mortgage and pay for the discharge as well as the legal fees for the mortgage at the new bank. This can make transferring your mortgage cost prohibitive or even impossible.
When you are renegotiating your mortgage, getting a new mortgage or are adding debt at the same bank that holds your mortgage, you need to clearly understand what debts are secured by the mortgage on your house and which are not and get it in writing.
Powell Associates Ltd. is a Licensed Insolvency Trustee (LIT) focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses. We offer free consultations to review your personal financial situation and practical debt resolution options. Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth - it's your choice