Most of the big banks have switched to a new ‘Collateral’ mortgage product in the last year. The question is why? Is it better for the bank or for you the borrower? On the surface, the bank will tell you that this new ‘Readvanceable’ mortgage which is registered at 100 per cent of your home’s value, gives you ‘Savings & Simplicity’ with the ability to borrow in future as your mortgage balance decreases, without incurring legal costs. Wow, what a deal. Sounds good right? Well hold on.
You cannot go to any other lender (if you are offered a better rate) because it looks like you have ‘Zero’ equity because your first mortgage is at 100% of value. Let’s say your mortgage is 50% of value, so you have 50% equity, and during the term a need arises that requires you to borrow more money. You are forced remain at the mercy of your bank, and what they offer you because it is difficult and at best, very expensive to break your mortgage. This also applies to selling your house, which on average Canadians do every 3.5 years. You have to stay with the same bank. Do you think they will give you a very attractive rate? Not likely. They will however, gladly give you a new ‘Blended’ rate which covers the cost of any penalty, but you will not know what the true cost (interest rate) you are paying on the new money.
If you lose your job is the bank going to help you make your mortgage payments? Or lend you more money? Not likely, because now you are considered ‘High Risk’. And get this, if you have credit cards with the same bank and you miss payments, the bank has the right to put you in default and realize on the security of your home property. Theoretically they can put your mortgage in default even if you have not missed a mortgage payment. AND they also have the right (read the fine print) to increase your mortgage or loan rates to prime plus ten per cent which today means, up to 13 per cent. You see folks, your credit cards are effectively no longer ‘Unsecured’ either. The bank has you coming and going.
So is it worth it to have your new first mortgage registered at the same value of your house? Obviously not. Bottom line, this new type of mortgage gives the banks complete control over you, and it appears that it puts them in a position to be able to charge you higher rates down the road, costing you dearly, especially when you have little choice but to stay with them. Look out for the renewal rate they will offer you as well. If you find yourself in a collateral mortgage, then please make sure all your credit cards are with other institutions.
We suggest that you avoid getting into a collateral mortgage altogether. Call us instead. We will not put anyone into this ‘scary’ product, and we will ensure that you will have maximum flexibility and maximum options to choose from for whatever needs you may have in future.