A client of mine living in the Clarington area was looking to get a line of credit for $150,000 on his property (worth, incidentally approx. $3 million!). He has a current mortgage of approximately $340,000, which was taken out at the time of purchase in 2020. The bank turned him down for the extra amount, but did not tell him the reason for this decision. The client then contacted me to see if I could help out and when I looked at his mortgage details, I realized that, while the original mortgage itself was for only $340,000, the bank had put a ‘Collateral Mortgage’ on the property for $1.4 million!
The client had no knowledge of this as the bank did not advise him at the time and was understandably very angry at having been duped.
So instead of being able to get a line of credit, at a reasonable interest rate, the client would now have to incur a rate of 9% plus a lender fee of another $7,000!
Pitfalls of Collateral Mortgages
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.
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 theoretically allows the homeowner to borrow extra funds at a later date, the extra funds based on the bank’s current lending criteria, and 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. The problem with this scenario is that at the point in time when extra funds are needed, the bank may refuse them as the borrower, due to circumstances beyond his control, may no longer qualify!
I 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 me for a small second mortgage or a Home Equity LIne of Credit (HELOC). I have to tell them that I 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! The bank has literally sucked all of the equity out of the property with a Collateral Mortgage. What’s the answer? Deal with a knowledgeable and respected mortgage broker!
If I can be of help with regards to the above, please do not hesitate to call me
Terry Lynch is a licenced mortgage agent with TMG, The Mortgage Group. In addition to conventional mortgage funding, lines of credit, commercial and construction loans, Terry also specializes in Challenged Credit and Reverse Mortgages. He also secures funding for a variety of businesses such as retail, restaurants, franchises etc.
Terry Lynch 416-315-1787