Collateral Mortgages

When purchasers or home owners who are borrowing to buy, or refinancing their mortgages are shopping for a mortgage, they usually care about the amount and interest rate. Equally important question is how the loan is going to be registered. Is it collateral or conventional mortgage.

While conventional mortgage has the same terms of registration as negotiated by the client, collateral mortgage is entirely different thing.

Collateral mortgages are becoming increasingly popular among the lenders, leaving it to the lawyers to deal with the surprised borrowers that their mortgage will be registered at an interest rate of 20% and an amount significantly higher than the amount actually borrowed. While the amount to be registered is usually disclosed to the client by the lender, no one mentions interest rate leaving it to the client’s lawyer to deal with this surprise. At that point in time the client is squeezed into a time constraint to a ‘take it or leave it’ option, usually only days before closing.

Collateral mortgages are locking up the equity and eliminating the client’s option to shop around for secondary financing using the equity when an emergency situation arises. Within the collateral mortgage the unsecured debts such as consumer’s loans or credit card debts become backed up against the collateral i.e. borrower’s home.

The lenders point out “advantages” that you would save on legal costs for refinancing and in future will be able to borrow more money without having to register a new security. What they do not mention is that you would have to qualify for any additional borrowing, and that locking up your equity with a collateral lender gives you no benefit of increase of value of your home over time considering that the collateral registration may go up to 125% of the current market value of your home.

So, when you are negotiating a mortgage make sure that you ask whether the lender will require registration of collateral security on your property.

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