People generally aren’t too familiar with collateral mortgages, which allow individuals to borrow an amount of money that is higher than the value of their property and are often offered at great rates. But be careful, because there are several aspects to this product that must be fully understood.
Let’s say you borrow $150,000 to buy a house worth $300,000. That doesn’t necessarily mean that your financial institution must register a $150,000 loan. In fact, it can instead register a maximum amount guaranteed by the loan, as well as a maximum interest rate. This is what is referred to as a collateral mortgage.
So, the mortgage can reach an amount that is higher than the actual loan, up to the total value of the property. It can even surpass it and reach 125% or 150% of the home’s value.
With a collateral mortgage, your financial institution can easily increase your loan as needed. You could then decide to undergo major renovation work on your new house and request an additional sum of $50,000, for example.
Keeping the example of an initial $150,000 loan, you could decide to get a $50,000 mortgage loan as a second installment. Or, if the conditions allow it and after your file has been evaluated, you could get a single installment loan of $200,000. So, you could close the first $150,000 installment and get a new one where you obtain $50,000 directly.
Conversely, with a traditional mortgage, you would have to refinance. Without a subsidiary clause, you would have to go back to the notary, which would incur additional registration fees, in order to access the same equity on your property.
Having a guarantee on an amount that is than your loan makes things easier if you need financing later on. However, you need to be aware of certain particular aspects of collateral mortgages:
With a collateral mortgage, while your financial institution may be in a position to give you a home equity line of credit in addition to your loan, additional financing isn’t handed out automatically. For any new loan, you will have to be requalified as per the credit regulations in place.
Collateral mortgages are regulated under Canada’s Personal Property Security Act (PPSA) and cannot be registered or transferred.
If you decide to switch to another lender and remove your mortgage from the registry (this is called discharging a mortgage), then you must reimburse all debts guaranteed by the mortgage to the original lender. In such a case, you may have to seek out a specialized lawyer.
A collateral mortgage is particularly beneficial if your home ends up increasing in value over time. You will then be able to easily turn this value increase into significant financing for your personal projects.
A collateral mortgage is a flexible solution that you need to understand well if you want to benefit from it. Your advisor could help you make an informed decision when shopping for a mortgage loan.
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