The financial world has irreparably changed. The way your corner bank did mortgages for your parents is not what you will experience today. The crazy part is that a surprising amount of Canadians do not know this. The fact is – your mortgage you signed with your bank is a Collateral Charge Mortgage (whether they will admit it or not). Here is the low down on this ‘scam’ and how to protect your family.
What is a Collateral Charge Mortgage?
A collateral charge mortgage has as its primary security a promissory note or loan agreement and as a back up, a collateral security in a mortgage against your property.
This is in stark contrast to the traditional standard charge mortgage we have known over the last 30 years. This is not your parent’s mortgage product. The main difference is in what happens after you have signed the dotted line and the mortgage closes.
To translate in English – The main difference between this way of registering your mortgage versus the standard charge is that the banks have all kinds of powers and additional recourse against you to enforce repayment of the mortgage as well as any other debts you hold with them personally. Sound like an abuse of power? Maybe even some sort of scam? Although totally legal under Canadian law – the lack of disclosure is where the scam-o-meter goes off the meter.
In fact, the banks have gone overboard in trying to keep you in the dark. From my own experiences – having clients told at their branch that the mortgage was not a collateral charge until they asked the lawyer who was to register the charge to finally get the truth – all the way to CBC’s expose: Busting The Banks where they literally had to rephrase the question 4 times on a hidden camera to get the truth!
Now why is this important to you? I am glad you asked. Here in a nutshell are the makings of a mastermind ‘scam’:
- Options to switch banks taken away – the Collateral Charge mortgage requires an additional legal fee on top of their administration fee to discharge and take your business elsewhere. This makes moving your business where a better deal is found to be too expensive.
- Interconnected Loans – your unsecured debts (LOC/credit cards) just became attached to your mortgage. If for one reason or another you end up defaulting on your line of credit – the next thing you know, equity from your home has been taken to pay off the account and it is closed. Under these circumstances – in most cases the bank could also start mortgage default proceedings.
- Registering up to 125% of the Home’s Market Value – this has been touted by the banks as the selling feature of the Collateral Charge mortgage. They say that as the value of the property rises – you will not have to requalify to access the equity in your home therefore saving money. What they are not mentioning is that we have just finished the largest real estate bubble in the history of the world. Property values in all major Canadian markets have leveled off if not dropping market values. The downside here is under the Collateral mortgage that the bank has the final say on whether you have access to your equity or not. I have had clients that had equity sitting in their home and under the mortgage contract were able to access it but the bank did not like what they were borrowing it for so they declined them access. How disturbing is that.
- Who jacked my interest rate? – if you go into arrears or default, under the Collateral Mortgage – the bank has the right to raise your interest rate by up to 10 percentage points. On a debt as large as your mortgage, this is not a small detail that should be overlooked.
Is the Collateral Mortgage a Scam?
Well by definition I would have to say no – although “to swindle someone by means of a trick” is a pretty apt feeling by those who are experiencing the downside to this mortgage product. We feel like those who are in power have a responsibility to provide full disclosure of the ramifications of the financial instrument we are agreeing to.
With the banks this is clearly not the case. I have even heard first hand that the assistant branch manager of a local bank where I live received formal training in how to answer customer questions regarding the Collateral Mortgage. One of the most telling signs of a scam is the intentionality of the scheming. This is not an accident.
How to Protect your Family
Having a team of independent financial experts who legally only represent you is of paramount importance. This will include a Mortgage Broker who is in the markets daily and will be able to determine from the over 400 mortgage products available to the Canadian consumer which is best for your family.
I am a passionate educator about mortgage and finance. I also am an investor in asset backed and real estate based investments. My wife and three boys live with me on a 30 acre horse farm up in Barrie, Ontario where we enjoy all four seasons. You can find Michael atMortgage Truth in Canada.