The banks are increasingly using the collateral mortgage as a dumping ground for all of a client’s unsecured debt without, argues a leading broker, disclosing it to the borrower.

“I have noticed on many power of sale docs that we have received that when the client has a collateral mortgage the bank has been including all unsecured debt such as overdrafts and credit cards,” Paul Mangion, principal broker of The Mortgage Centre - M.O.S. MortgageOne Solutions Ltd., in Mississauga, told “They always tell them if you need more money it will be easy to approve later without legals, but never tell them we will be able to transfer all your liabilities under that collateral.

"If you think that a bank is using collateral mortgages for the future benefit of the client, you should give your head a shake and think again."

Mangion is among the first to sound the alarm about what others charge is a blatant misuse of the collateral charges mortgage, already faulted by brokers for limiting the transferability of the loan  and effectively tying the client to a bank that may ultimately decide against extending additional credit at the time of a crisis.

“They are even refusing to lower their collateral charge to let the clients seek financing from other sources,” he said Thursday. “The main big banks are the worst offenders, and I have even seen CIBC use balances from customers’ lines of credit to pay a credit card and then cancel it.”

Lenders increasingly view that kind of maneuvre as a way of backing secured debt with tangible assets that may ultimately be sold, allowing them to recoup credit card and consumer loans as well as unsecure lines of credit.

That’s particularly dangerous for homebuyers facing the threat of interest rate increases and a probable correction in housing prices.

It’s also likely to renew broker opposition to collateral charge mortgages even as some lenders move whole product lines in that direction.

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