What is a collateral mortgage?

05 July 2023 by National Bank
Collateral mortage

A collateral mortgage can allow you to borrow an amount greater than the value of your property. Let's review some of its features to see how it can help you carry out your projects. 

What is a collateral mortgage?

A collateral mortgage is a way for  you to obtain a loan amount equal to or even greater than the total value of your property. 

It's a way to get additional financing at a lower rate. It’s often used for new construction projects or for major renovations that will affect the property value.

Example: let's  say you have a down payment of $80,000 and you borrow $220,m000 to buy a home worth $300,000. Instead of approving and registering a $220,000 loan, your financial institution could register an amount secured by your home that is higher than the amount of your loan. This amount could go up to $300,000 or even higher. 

To better understand mortgage terminology, read our article: 
Mortgage terminology you need to know when buying a home  

The main advantage of a collateral mortgage: flexibility

With a collateral mortgage, your financial institution can increase your loan based on your needs without requiring you to pay additional fees, such as notary fees. You'll need to requalify according to current credit standards and obtain your institution's approval. For example, you could decide to carry out major renovations and request an additional $50,000 to finance them. 

To understand your options when it comes to tapping into your home equity to finance your projects, please read our article:
Mortgage refinancing: why should you refinance your home?

Good to know

With a conventional mortgage, you would have to submit a new credit application and go back to a notary or other legal professional (depending on your province) to obtain additional financing. This would result in additional fees.

Some factors to consider for a collateral mortgage

Eligibility for a collateral mortgage

Note that a collateral mortgage doesn't guarantee you additional financing. As for any new loan, you will need to requalify based on the credit standards in effect and your credit score.

A collateral mortgage limits guarantees from third parties

Collateral mortgages are regulated under Canada’s Personal Property Security Act (PPSA) and the Quebec land register. This means that the portion of your property used as collateral for this mortgage cannot easily be used as collateral for another loan.

It also means that a collateral mortgage is difficult to transfer to another lender. This significantly limits your options at renewal and reduces your negotiating power at the end of your mortgage term.

Your home equity increases

A collateral mortgage is particularly beneficial if your home equity increases over time. You'll be able to leverage your home equity to finance your personal projects, make investments, or deal with unexpected events.

A collateral mortgage can be a flexible and advantageous solution. Feel free to call on your advisor to help you understand and make the most of this solution. They can help you make an informed decision.

Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at Financial National Bank for more info. Don't have an advisor? Schedule an appointment in just a few minutes.

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