Buyer Beware

How Collateral Damage can affect you.

A recent trend in the market should cause you to be wary of what you are signing when purchasing your home.

Assuming you require financing, as most of us do, we approach a lender and try and secure a mortgage of some sort to close the deal. If you are approved the lender then registers a charge on title (conventional mortgage) which reflects the actual amount of the loan, interest rate, term etc. For example if you purchased a house for 250,000 and had a down payment of 50,000 the mortgage registered would be in the amount of 200,000.

Should another lender decide to lend you money as a second mortgage, there is nothing stopping them from doing so, assuming you meet their approval criteria. (Good credit rating and capacity to pay.) In addition most lenders will accept transfers of conventional mortgages from others at little or no cost to the borrower. Contrast this with a collateral mortgage.

Lenders who offer and promote collateral mortgages may be in fact handcuffing you to their institution for an extended period. Using the same example noted above the lender registers a charge against the property in the full value amount of the property. In this case 250,000. The actual loan is still 200,000 but you will find it very difficult to switch your mortgage to another lender as a full discharge fee will be applicable and legal fees for a new mortgage will be at your cost unless the new lender is prepared to cover such; an unlikely event. In all likelihood you will be unable to secure a second mortgage as the first has been registered for the fully appraised value of the home.

The lender can advance you more funds if you wish to access the equity in your property and there would be no additional legal costs. Say for example you are looking to renovate the house and you have built up more equity beyond the initial 50,000 down payment. In theory you could revisit the lender and request funds up to the difference between the current outstanding balance on the mortgage and the registered amount. (250,000). However, If they refuse to provide any additional funding ,which they may do depending on the situation you are now forced to find an alternative lender. Now you are looking at possible penalties, discharge fees and legal fees.

Another downside to the collateral type mortgage is the lenders ability to use such to offset any other unpaid debts you have. Offset is a right under Canadian law that says a lender may be able to seize equity you have in your home, over and above the mortgage balance, to pay any loan you may have co-signed that is in default with the same lender. For example if you had co-signed a loan for a family member and they default you may be left holding the debt and if you are unable to resolve the matter the lender could then proceed against your home in order to settle the debt.

Consult with your lawyer before signing any mortgage documents.

If you are considering a purchase or a refinance give us a call. As an Accredited Mortgage Professional we can review your particular situation and make sure we do what is best for you, not the lender.