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Pitfalls of a Collateral Mortgage

A client (we’ll call him John Smith) came in to see me.

  • He owns a home worth $375,000.
  • He told me he has $25,000 outstanding on his mortgage.
  • He also told me he has a $250,000 secured line of credit on his home that is fully advanced.
  • Total owing is $275,000.

This is what the client thinks he has.

What the client didn’t understand is that when the bank gave him the L/C for $250,000, they refinanced the property and gave him a new 1st mortgage with $25,000 as a fixed portion and $250,000 as a secured L/C portion. Both are simply one mortgage with two parts, total borrowed is $275,000.

What he also didn’t NOT know (he was told in very fine print, but NOT explained) is that the mortgage was in fact registered against his home for $375,000, the full value of his home. But remember that the bank only lent him $275,000.

What he now knows is that he has a “collateral” mortgage. Most collateral mortgages register at 100% of the property’s value, sometimes up to 125%, depending on the lender.

So where is the problem? This year Mr Smith has decided to sell his home, and needs to do some renovations before selling the home in today’s competitive market.

He approached his bank to borrow another $25,000, and due to income not qualifying, this time they said they couldn’t help him. Sorry, they said.
So Mr Smith comes in to see me, and I have to tell him that because he has a collateral mortgage that is registered for 100% of the property’s value, I can’t get him any more money. Even though he has only borrowed $275,000, and his property is worth $375,000, the mortgage is registered for $375,000. There is technically no equity in the home for me to mortgage against.

In fact NO ONE else can give him a mortgage. There are no options, without going through the process of discharging and refinancing all of the existing financing. He can’t get any further money from me or anyone else using his homes equity. He has a big PROBLEM, that NO ONE can help him without a major expense, except of course his bank, who has said, SORRY, we can’t.

The lesson to be learned here is to think VERY carefully before accepting a collateral mortgage from ANY bank. And the real life example I have given above is just one of the problems associated with having a collateral mortgage. There are many more that I will let the following article summarize more of the pitfalls of a collateral mortgage.

As of the writing of this, T.D. bank, National Bank, and Tangerine are registering all new mortgages they give as collateral mortgages. As well, any mortgage with any bank that has multiple products in one mortgage is also registered as collateral.