• collateral mortgageUnderstanding if a Collateral Mortgage is Good for Me

    Most Canadians believe everything they hear from their trusted banks are gospel. We are a trusting bunch in the Great White North. In a recent article by Maclean’s Magazine, only 30% of mortgage holders in Canada knew what ‘amortization’ meant. Not to worry, we are in the business to seriously help.

    It gets us thinking about collateral mortgages. Do homeowners really know what it is? Probably not.

    The definition of a collateral mortgage is simply a type of mortgage where the lender can give you more money in the future without you refinancing or seeing a lawyer. Still don’t get it? Think of it as a glorified credit card. In essence, it’s a bigger form of revolving credit.

    Example:

    Value of Home $450,000
    Collateral Limit $300,000
    Current Balance $100,000
    Available Credit $200,000

     

    Limit on Card $5000
    Current Balance $1000
    Available Credit $4000

    Okay. Now that we basically understand this, let’s take a look at the positive and negative of the product.

    Positives:

    1. Flexibility – No need to see a broker, banker, lawyer or get another appraisal.
    2. Saves Money – No future legal bills.
    3. Accessibility – Your money is ready immediately when an opportunity or emergency comes up

    Negatives:

    1. Lack of Flexibility – If you are mad at the lender or want to transfer the collateral mortgage, another legal bill is required.
    2. Could Impair Future Borrowing – Some institutions include a full payment to the mortgage amount you’re registered for, which denies other borrowing.

    Example: You have a $300,000 collateral mortgage with a zero balance, but the bank includes a full payment as if you were at your limit.

    1. Lack of Leverage – Once the bank has you in a collateral mortgage, do they really have to compete once the mortgage term matures? The banks now know that there is a lot of trouble in terms of expenses to switch. With that said, they do not have to offer you the best rate and you lose your power to negotiate.

    Banks set up collateral mortgage limits to 125% of the value of your home. If your credit turns for the worst due to some temporary issues, such as job loss, then it will be near impossible to get a short-term second mortgage.

    Example:

    House Value $500,000
    Collateral Limit $600,000
    Current Mortgage $350,000

    Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can contact Robert here.

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