Should You Agree to a Collateral Mortgage?

If you are buying a home in Ontario, before you agree to a collateral mortgage – or if you are having difficulty with your current collateral mortgage – discuss your mortgage and your related legal concerns with a Toronto real estate lawyer.

Banks aggressively promote collateral mortgages, but a collateral mortgage may or may not be appropriate for you. Obtaining a collateral mortgage is having a line of credit and a mortgage approved simultaneously and using the property as collateral for the line of credit.

What do collateral mortgages entail? What are the pros and cons of collateral mortgages? How will a collateral mortgage affect your credit rating? What else should homebuyers know about collateral mortgages? Continue reading to find the answers that you and your family may need.

What Does a Collateral Mortgage Entail?

When you are approved by a mortgage lender for a collateral mortgage, it means that you are approved not only for your home mortgage but also for another loan which may be worth as much as 125 percent of the home’s value.

Thus, collateral mortgages are in effect two different loans at once. You are approved for a traditional mortgage, but you are also approved for a line of credit based on your home’s equity, so the amount that you may borrow slowly rises as you continue to build equity in your home.

How Does a Collateral Mortgage Work?

Let’s say that you are buying a home in Ontario for $1,000,000 with a 20 percent ($200,000) down payment. You need a conventional $800,000 mortgage, but the mortgage lender instead approves you for a collateral mortgage worth 125 percent of the home’s value (or $1,250,000).

After several years, let’s say, you discover that you will need to replace the home’s central air conditioning and heating system, and that replacement will cost about $20,000. Will the collateral mortgage that you were approved for supply the cash that you will need?

If the home is now valued at $1,100,000 and you have $700,000 left on the mortgage, you can borrow 80 percent of the home’s value ($880,000) minus the $700,000 you still owe. That comes to $180,000, easily more than you’ll need to replace your air conditioning and heating system.

What Are the Disadvantages of Collateral Mortgages?

Banks benefit from collateral mortgages by making it difficult or impossible to switch lenders before a collateral mortgage is discharged. While collateral mortgages provide convenient access to cash you may need, a collateral mortgage may also entail some significant disadvantages:

  1.  You could pay a substantially higher rate of interest on the extra cash you borrow. Your mortgage lender may raise that rate at any time and for any reason.
  2.  Other lenders will be more likely to reject your loan application. Using the previous example, another lender will see that you have already accrued $1,250,000 of debt for a $1,000,000 asset, so you will not look like a good candidate for a loan.
  3.  Because collateral mortgages are difficult or impossible to transfer to different lenders, you will probably have to discharge the mortgage instead of transferring it, or a transfer may require additional legal fees, discharge fees, and in some cases, penalty fees.
  4.  Of course, anything you borrow with a collateral mortgage has to be repaid. Because your home itself is the loan’s collateral, if your employment is disrupted by an illness, injury, or a job termination, a collateral mortgage could put your home at risk of foreclosure.

Is a Collateral Mortgage Right for You?

Collateral mortgages allow homeowners in Ontario to access the equity that they have built in their homes, but a collateral mortgage can also burden a homeowner with considerable additional debt. Before you agree to a collateral mortgage, do your research.

Ask your accountant or financial advisor, your mortgage advisor, and/or an Ontario real estate lawyer for personalized advice regarding the details and costs of a collateral mortgage and the overall impact of a collateral mortgage on your credit rating and your finances.

In fact, you should have a real estate lawyer advise you whenever you buy or sell real estate in the Toronto area. An agent, broker, or lender can’t offer you legal advice or take legal action on your behalf. Your real estate lawyer can, and your lawyer will not have a conflict of interest.

What Will a Real Estate Lawyer Do for You?

Avoiding court is usually in everyone’s best interests, but if a real estate or mortgage matter can’t be settled privately, a court will settle it. You should be advised – from the beginning of any real estate transaction – by a lawyer who is experienced in real estate law, negotiation, and litigation.

Unanticipated disagreements – with a seller or with a mortgage lender – may emerge when you purchase a home or even after the transaction has been finalized. Consulting in advance with a real estate lawyer may reduce your long-term costs and help you avoid future legal problems.

If you are buying a home in or near Toronto, and if you are not already working with a real estate lawyer, when a legal concern emerges, compile the pertinent papers and documents and speak as quickly as possible about your concern with a Toronto real estate lawyer.

How Should You Select a Real Estate Lawyer?

A real estate transaction is never simple. Without a real estate lawyer, unless you are a real estate professional, you could expose yourself to avoidable risk. But with the advice and services of an Ontario real estate lawyer from the beginning, you can reduce or entirely avoid most of your risk.

When you buy a home, nothing should be wrong or go wrong. Our team of lawyers at Financial Litigation has considerable commercial and residential real estate experience. We represent real estate brokers, businesses, and lenders, as well as anyone who is selling or buying a property.

Financial Litigation works with Ontario homebuyers to resolve mortgage- and real estate-related disputes. We will fight diligently and effectively on your behalf to achieve your goals and meet your legal needs. If no private resolution is possible, we will advocate on your behalf in court.

If you need legal advice or legal representation regarding a collateral mortgage or any other mortgage- or real estate-related matter, call the Toronto law offices of Financial Litigation now at 416-769-4107, and let one of our lawyers advise and work for you.