Some banks have introduced a plan to gain greater control over their clients by way of a collateral mortgage.
When you get a mortgage from some banks the mortgage may include a re-advance clause or a collateral mortgage pledging your equity to the bank.
That way they can also market to you financial instruments such as credit cards and tie them to your home.
Going forward, if you want a second mortgage or want to refinance their loan or even switch lenders at renewal; it could be difficult.
The promissory note that you sign is placed on your property as a lien and gives the bank security up to 125% of the value of the property regardless of the mortgage size.
If you own a $300,000 home and owe $150,000 you might think that you have equity of $150,000 to do with as you please. The bank do not want you to have that control; this way you have to go to them.
The banks may have registered a $375,000 charge on your $300,000 home. This does not mean that the borrower has access to those funds. If you need future increase on your line of credit, they will still require you to go through the application process and qualify.
The banks tell you that by doing this you may be able to borrow more money in the future with no additional legal costs. Of course there is no guarantee of that because they will most likely required a new application and possibly a new appraisal in any event. In our opinion this is simply designed to have greater control over you, the clients.
Beware of collateral mortgages and a clause called a re-advance clause. If you do agree to the clause have a full understanding of it and be sure to ask your lawyer for a full explanation.
The banks look to take care of their bottom line not yours; mind you this is not necessarily what they say in the news media.