What Is The Difference Between Collateral Mortgages And Normal Ones?

collateral mortgages

From the very beginning, from the very moment you have thought of getting a mortgage you need to make dozens of various choices. Will it be of collateral mortgages type or just a mortgage? Fixed or variable? Short term or long term? And so on, and so forth.

Basically, the difference between collateral mortgages and normal ones is simple. The first one is more flexible. For mortgages, a mortgage charge is used, while for collateral mortgages collateral charge is used. Collateral type is more preferable for you if you think that you will need more money in the future to buy the property, so you can adjust it, while a simple mortgage does not have such options.

What a Collateral Mortgage Is

We are sure that you know about simple mortgages a lot already, so let’s talk about collateral mortgages. A collateral mortgage is a readvanceable mortgage product, meaning that your lender can lend you more money as your property value increases without having to refinance your mortgage. For this, your lender opens something similar to HELOC for you. And after that, you can borrow money from your home any time!

Mortgage lending today is an opportunity to purchase real estate for those who do not have the full amount for its purchase or construction. Despite the need to pay interest in addition to the main debt, this banking service, which gives a chance to significantly improve their living conditions, does not lose its popularity. 

Competition between banks is the reason for the increase in the variety of offers, which today cover the vast majority of the potential needs of their customers. Some of them can be called quite attractive. One of the schemes is that a mortgage is opened on the security of existing real estate. 

Advantages and Disadvantages of Collateral Mortgages

Let`s do something new and start from something less pleasant. Disadvantages of collateral mortgages are:

  • If you decide to change your lender you still will need to pay legal fees
  • It can get really hard to calculate your expenses because on paper it will look like you owe a lot (and it is not quite true)
  • Conditions may be less favorable than for a regular mortgage

And what about the good side? Of course, there are advantages, here they are:

  • The ability to avoid legal costs and tons of paperwork for refinancing
  • The ability to borrow money from your home at any time
  • This type provides much more freedom of choice

2 Steps to Calculate Your Collateral Mortgage

It is not for nothing that the mortgage is formed from the ancient Greek word for a stand. A mortgage is a variant of a real estate pledge, in which the real estate object remains in the possession and use of the debtor, and the creditor, if the debtor fails to fulfill his obligation, acquires the right to receive satisfaction through the sale of this property. Like any other pledge, a mortgage is a way of securing the fulfillment of obligations.

As for the collateral mortgage, let’s look at how it is formed and what you need to do to understand how it works. First of all, after your offer was accepted and you are casually chatting with your mortgage broker about your spotless future he or she tells you that can make your mortgage collateral and the lender may be able to register your mortgage for up to 125% of the value of your new home.

To make it clearer, we will give an example. Your new home`s price is 400.000$ and you already made a 20% down payment (80.000$) meaning that you need to borrow 320.000$. Now let’s calculate registered home value with a collateral charge mortgage. If it stays at 125% (max loan-to-value ratio) it will be 500.000$ thus completing our first step.

Not all lenders will register your mortgage for more than your original mortgage amount. For those that do, they can give you up to 80% of your property goes up without refinancing. But to calculate it you need to subtract what you still owe on your mortgage. Take 450.000$ (+50.000$ because it went up), calculate 360.000$ (max loan-to-value ratio if take 80%), subtract what you still owe (100.000$ for example) = 260.000$ which is your available equity.

1. Calculate registered home value with a collateral charge mortgage

2. Calculate available equity

Where Can You Get a Collateral mortgage?

TD Bank and ING DIRECT are your 2 friends who offer collateral mortgages ONLY. Other banks usually include them too, but it is still better to ask your mortgage broker about this possibility.

Collateral Mortgages: Conclusion

Essentially, collateral mortgages are more complicated than normal ones but they are also more flexible. They can allow you to avoid different fees but can be really harmful in terms of interest. However, it is for you to decide which one you will choose. 

Leave a comment

Your email address will not be published. Required fields are marked *