“Following a move that TD Canada Trust made this past October, ING, the bank known for helping you “save your money” will now also only be offering collateral mortgages to their customers. The move has many consumers outraged, while it has others asking, “Just what is a collateral mortgage?”
A collateral mortgage is one that a the onset, looks great for the customer. The mortgage places a line of credit on your home (and at up to 125%, a bigger secured line of credit than what you’ll get with a conventional home equity line of credit.) Because of this high amount though, the mortgage is actually seen to other lenders as a lien against your home – something that is enough to have any homeowner running away screaming. Because those other lenders see it as a lien, you will then not be able to apply for credit with any bank or lender, other than the one that supplied you with the mortgage.
But it gets worse. While it might be nice to think that you have a secured line of credit, that’s actually worth more than your home, you’ll still have to apply for that line of credit should you ever decide to borrow against it. At that time, it’s purely up to the lender’s discretion as to whether or not you qualify for that line of credit. Yes, just because you enter into a collateral mortgage doesn’t actually guarantee that you’ll be eligible for that sweet line of credit. And what does that mean? Basically, that you signed into the collateral mortgage agreement for no reason. And are now locked into something that can only hurt you.
So at that time, why not just break your collateral mortgage and go with a lender that will give you the mortgage that you need? Ah, because collateral mortgages are non-transferable – but don’t expect the lender to tell you that at the time of signing. Most other lenders won’t transfer a collateral mortgage and in order to get out of it, you might have to pay some costly fees. That’s if you can get out of it at all. If you currently have more owing on the home than expressed in the government guidelines, you’re stuck and won’t be able to get out of the mortgage. If that happens, the lender can then raise your interest rate, forcing you to pay even more, because they know that you’re out of options. This non-transferable mortgage means essentially, that the bank will control your life. If you need to move, but still owe to much on your mortgage, you won’t be able to.
Not surprisingly, neither TD nor ING has been heavily promoting their collateral mortgages. They quietly slipped in these new rules, one can only think in the hopes of luring more customers into their mortgages – and then forcing those customers to stick around for the next 10 or 15 years. The lenders of collateral mortgages are likely to never tell you it’s in your best interest to get a lawyer to look over the paperwork, because a lawyer would most likely tell you it’s not in your best interest. So what are you to do?
Walk away at the first mention of a collateral mortgage. These mortgages are designed to benefit banks, and only the banks. And if you sign into one without knowing the repercussions, you could be stuck with a mortgage – and a home – that you no longer want. “