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22 Jan



Posted by: Tracy Luciani Price


This story goes as follows. Parents co-sign for a $5,000 credit card for their college bound daughter. The daughter parties hard like so many first year college students do, maxes out the card and makes no payments without her parents knowledge. 

One fine day, the parents receive a power of sale notice from their bank. They are in shock wondering how this can happen (especially without any warning) when they never missed a payment on their mortgage or line of credit. Turns out that the bank applied the mortgage payment to the ‘highest interest’ credit card debt which technically put the mortgage into arrears and eventually into ‘default’. With three months payments behind the bank issued the power of sale notice and stopped accepting any further payments. 

It gets worse. The parents owned a home valued at $425,000 that had a mortgage of approximately $225,000. The problem was that they got a new ‘Collateral Mortgage’ which the bank registered at over 100 per cent of the value. So despite having over $200,000 equity they could not refinance or raise any new money because it appeared like they had no equity.  

Unfortunately when they took out the new purchase mortgage, the bank did not disclose the fact that any unsecured credit cards ‘effectively’ become secured credit cards. All the bank told them was that the $225,000 mortgage was going to be registered at or slightly above the property value so that in future, they could access their new ‘global’ credit limit easily and cheaply without even the need or expense of a lawyer.  

The way in which collateral mortgages are presented by the banks makes them look attractive on the surface. Unfortunately, and we have written about this many times, below the surface is a minefield and in this case a nightmare.  

Folks in the past year, we have seen people receive power of sale notices (with their mortgage payments up to date) for having realty tax arrears, for letting their properly insurance policies expire or get cancelled, and for having repeat late payments and despite always coming up to date the banks called for the mortgage to be paid in full and went on the attack to legally force the sale of the real estate.  

The problem is, the fine print is never discussed. And the devil is truly in the details with collateral mortgages. What bank customers do not know is that in truth a collateral mortgage puts the bank in complete control over the client. Even if there never is a problem, in future if the customer needs a refinance, a new line of credit etc., the bank is less competitive on the interest rate they offer because they know it is very difficult if not impossible for the client to seek money elsewhere.  Remember there ‘effectively’ is no equity. 

We view the new banks’ collateral mortgage product as undesirable, and we do our best to protect our clients by placing them in non-bank products with much better terms including early payout penalties. 

Please call us first for independent expert advice before you consider any bank mortgage.