WHAT IS COLLATERAL MORTGAGE
Before we discussed collateral mortgage, let’s first discuss mortgage.
What is a mortgage?
You’ve seen this word before, but maybe you haven’t really paid attention to what it is. Let’s talk about it.
A mortgage is an agreement between you (the borrower) and a mortgage lender to buy a home without having all the cash upfront. The home is used as collateral.
A mortgage is a type of loan used to purchase or maintain a home, land, or other types of real estate.
The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest.
The property then serves as collateral to secure the loan. A borrower must apply for a mortgage through their preferred lender and ensure that they meet several requirements, including minimum credit scores and down payments.
Mortgage applications go through an underwriting process before they reach the closing phase.
Mortgage types vary based on the needs of the borrower, such as conventional and fixed-rate loans.
Who gives out mortgages? Most banks offer highly competitive mortgage options for their members.
How do you qualify for this?
Most home loans are only provided to those who have sufficient assets and income relative to their debts to practically carry the value of a home over time.
The lender (your bank) may ask for different things including assets, other bank statements, pay slips, business records, cash records before approving the loan. They may also request another person to cosign your mortgage for you if need be.
What is the interest rate?
That varies from lender to lender as well as the borrower. Riskier borrowers may have a much higher interest rate compared to others.
A home equity loan is also a mortgage. The main difference between a home equity loan and a traditional mortgage is that you take out a home equity loan after buying and accumulating equity in the property.
A mortgage is typically the lending tool that allows a buyer to purchase (finance) the property in the first place.
As the name implies, a home equity loan is secured—that is, guaranteed—by a homeowner’s equity in the property, which is the difference between the property’s value and the existing mortgage balance. For example, if you owe $150,000 on a home valued at $250,000, you have $100,000 in equity.
Assuming that your credit is good, and that you otherwise qualify, you can take out an additional loan using that $100,000 as collateral.
Like a traditional mortgage, a home equity loan is an installment loan repaid over a fixed term. Different lenders have different standards as to what percentage of a home’s equity they are willing to lend, and the borrower’s credit rating helps to inform this decision.
WHAT IS A COLLATERAL MORTGAGE?
A collateral mortgage is a way of registering your mortgage on title. This type of registration is sometimes used by banks and credit unions.
Monoline lenders, on the other hand, rarely register your mortgage as a collateral charge – which is an all-indebtedness charge that allows you to access the equity in the home over and above your mortgage, up to the total charge registered.
What this means is that you may be able to get a home equity line of credit and/or a readvanceable mortgage, or increase your mortgage without having to re-register a mortgage.
This is a real benefit to you in some cases because re-registering your mortgage can cost up to a thousand dollars.
However, there are some negatives to having a collateral mortgage.
First and most glaring – because it is an “all indebtedness” mortgage – it brings into account all other debts held by that lender into an umbrella registered against your home. This means that your credit cards, car loans, or any related debt at your mortgage’s institution can be held against your home, even if you’re up to date with your mortgage payments.
Secondly, if you want to switch your mortgage over to a different lender, they may not accept the transfer of your specific collateral mortgage. This means you’ll need to pay additional fees to discharge the mortgage and register a new one.
And lastly, collateral mortgages make it more difficult to have flexibility to get a second mortgage, obtain a home equity line of credit from a different institution, or use a different financial instrument on your home. This is because your collateral mortgage is often registered for the whole amount of your property.
To recap, collateral mortgages give you the flexibility to combine multiple mortgage products under one umbrella mortgage product while tying you up with that one lender. While this type of mortgage can be a great tool when used correctly, it does have its drawbacks.
What is a collateral mortgage?
A collateral mortgage is when the lender puts more money on title than what your actually mortgage is.
The benefit to this is when or if you want a line of credit (secured) it is already set up on title.
The downfall to be aware is you are now tied exclusively to that bank…can’t go ANYWHERE else. So should you for whatever reason need to talk to another lender, you can’t because the first one has locked down all your equity.
To be truthful it is dirty business but at this time not illegal. Another important thing to know is at renewal if can cost you 10x more to transfer to a different lender because of how they have registered the mortgage.
Step into a collateral mortgage with eyes wide open and consider your options.
Who does a collateral mortgage really help? The lender. So buyer beware on this product.