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 borrow more money, 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 is typically designed to secure all debts that you have to that bank, and there is no dollar limit on the mortgage.

If the only debt you have with that bank is a mortgage, that is all that will be secured. If you have a home equity loan, line of credit, credit cards and overdraft protection, all of this debt could be secured by the collateral mortgage. Unfortunately, it is not always clear which debts, at your bank, are secured by the collateral mortgage and which are not. You need to understand this and have it in writing from the bank.

The advantage of a collateral mortgage is that it makes 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.

A disadvantage of a collateral mortgage is that other debts, with your bank, such as lines of credit and credit cards, could also be secured by the collateral mortgage. 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.  

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. Transferring your mortgage to another bank could be very expensive or even impossible.

When you renegotiate 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 debts are not secured by your mortgage and get it in writing.

Powell Associates Ltd. is a Licensed Insolvency Trustee. We are experienced, hands-on insolvency practitioners who understand the personal impacts of major financial stress; 

• You won’t be stuck in an assembly line process. 

• You will expect and receive prompt responses and resolution of issues from our supportive and experienced team.  

• We will review your debt solution options, including filing a consumer proposal or personal bankruptcy. 

• We help Canadians with overwhelming debt get fresh financial starts.  

Once you file a consumer proposal or personal bankruptcy, we deal directly with your creditors on your behalf. Your unsecured creditors are required to stop contacting you or continuing legal proceedings against you. Contact us for a free consultation.  

We offer free consultations to review your financial situation and practical debt resolution options. Contact us to discuss your situation over the phone, a video chat, or in-person in Saint John, Moncton, Fredericton, Charlottetown, Dartmouth, or Miramichi.