We are experiencing the lowest interest rates in Canadian history. Although the cost of a house or condo is higher than ever, it has never cost us less to finance one. And so, banks are aggressively marketing low mortgage rates. As homeowners, we feel like we’re the winners – it’s a race to the bottom, and we’re happy to watch it happen.
But amidst all of the low rate fanfare, we need to remember that banks are profit-focused corporations. If rates are lower, their profits on those mortgages are lower. Therefore, other strategies must be employed if banks are to meet the expectations of their shareholders.
Borrowers who switch lenders at renewal time have always been a threat to banks. Therefore, they want to make it tough for you to move. One strategy is the collateral mortgage. Most banks are now registering mortgages as collateral loans rather than mortgage loans. Not only are collateral mortgages more expensive to move, banks are advising consumers to commit up to 125 per cent of their home’s future borrowing value with them. The bank controls all of the collateral, meaning homeowners can’t leverage the equity for a home equity loan with another lender. This effectively handcuffs the borrower to the bank without the borrower realizing it.
A collateral loan can be the right choice for certain situations – we make sure clients understand their options and the implications.