When it comes to a mortgage for your house, there are numerous factors to consider. Fixed rate vs. variable rate, term length, down payment percentage… these are a few of the more common things to consider.
One of the lesser known options when it comes to taking on a mortgage is the collateral mortgage. Because it is less familiar to many, it is often misunderstood as well. Let's unpack how this type of mortgage works compared to a conventional mortgage (aka standard charge) and see if it's something that could benefit you.
How a Conventional Mortgage Works
To start, let's review a conventional mortgage so we know what we're comparing a collateral mortgage against. A conventional mortgage is a document that is registered against the title of your property. This document highlights all the details of your mortgage including the original borrowed amount, the term length, amortization period and interest rate.
In terms of how this type of mortgage functions, as you pay down this mortgage, the amount borrowed decreases over time. What's also really important is that the amount the lender can claim against you in the case of a default also decreases as you pay down your mortgage.
What Is A Collateral Mortgage?
A collateral mortgage differs from a conventional mortgage in that you can borrow beyond the initial amount needed to gain a property. You can borrow up to the total value of the property and sometimes even up to 125% of the value of the property.
Additionally, with a collateral mortgage, the details of the mortgage aren't registered against the title of the property. The documentation will only name the amount of money available to be borrowed.
Benefits Of A Collateral Mortgage
A collateral mortgage can be advantageous if you are in a situation where you are wanting to borrow for more than just a single property. Perhaps you have two properties you are wanting to mortgage or maybe you are wanting a line of credit alongside your mortgage to finance other expenses. Maybe you are wanting to use the equity in your home to invest. A collateral mortgage can be helpful in these situations as it's essentially one charge for multiple loans.
Risks Of A Collateral Mortgage
While there are some helpful benefits that come with a collateral mortgage, there are also some notable risks.
First, collateral mortgages are difficult to move if you are ever wanting to change lenders or if your circumstances change drastically. While you only have one charge against your property title, you may have multiple loans within that charge and it can be difficult to transition multiple loans smoothly.
A second notable risk is that lenders can register other borrowed products under the collateral mortgage charge. These other products can include lines of credit, vehicle loans and even credit cards. This can become risky in the event where you fail to make a payment on one of those other lending products and suddenly your primary mortgage is subject to foreclosure. To be fair, this is extremely unlikely with no documented cases yet, but the potential is there which might be enough risk for some borrowers.
Is A Collateral Mortgage Right For You?
While a collateral mortgage has some intriguing features, it's pretty fair to say that most homeowners will likely find a conventional mortgage to be sufficient for their borrowing needs. Conventional mortgages are cheaper products to get into with a lot of flexibility and peace of mind. If you are a typical homeowner without a great need to leverage all the equity in your home, a conventional mortgage can be a great thing to stick to.
On the other hand, if you are self-employed and need access to extra funds for your business, lifestyle expenses or investing, tapping into a collateral mortgage can be advantageous. It's important to be aware of the risks associated with this type of mortgage product, but if you assess things properly with mortgage professionals, this can be a helpful path to take.
As always, we are available to help you in assessing these things. If you have any questions or are curious about whether this lending product might be a good fit for you, we are happy to connect with you and offer assistance as needed.