Recently there has been a lot of talk about multi purpose mortgages or collateral mortgages. While they can be called many different names it is basically when a bank or credit union registers a charge on your property for a larger amount then the mortgage, as a “running charge”. They sell it to the consumer by outlining only the benefits: you can access future equity when you need it. You can have a Home Equity Line of Credit “just in case”. What they are not tell you is how it works, what are the negatives and if there is future impact on their customer. So let me break it down for you.
How does it work?
1) Property Value = $600,000 and you have a mortgage amount of $480,000 (20% down).
2) The bank will register a their “running“ charge on title at the value of your property $600,000 or more with the lawyer/notary.
3) The benefit or selling feature is if the property value goes up (not guaranteed) and the mortgage amount goes down (as it should) then you will be able to draw from the additional equity in the property without large lawyer’s costs again. Basically the bank goes back to the original charge and draws from it without affecting the legal documents, confusing I know!!
What they are not telling you?
1) You still have to qualify at the time you want the additional funds with the bank. If you do not there maybe nothing else you can do until that mortgage is up for renewal. So it will stop you from getting a second mortgage or Home Equity Line of Credit anywhere else, even if the rate is better or you actually qualify.
2) The running account restricts how you can transfer your mortgage at the end of the term to most of the other financial institutions.
3) If the bank or credit union does not approve the renewal or future refinance of your mortgage. The issue becomes a deadlock because another alternate lender may not be able to transfer your mortgage at renewal & will definitely not be able to give you a second mortgage or home equity line of credit in the future.
What can you do?
1) Know what you are signing. If it states running account or the charge amount is greater then the funds you are borrowing, advise the lender that you do not want that option. Tell them you do not want a collateral charge. This could save you in the future!
2) Ask for help! Give me a call for your free mortgage review at 778-839-7958. If could save you in the future.
Take a look at a recent situation with TDCT that hit the news on CBC Marketplace!