The Ultimate Guide to Collateral Mortgages in Canada for 2022

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    Collateral mortgages are good for people who want quick access to money.  It can be very beneficial in situations where your house appreciates quickly in value. Consider this option if you are getting a good deal and you expect to add value to your home by adding new features or doing upgrades. In this collateral mortgage guide, we’ll explain all there is to know about collateral mortgages including their pros and cons and how to apply for one.

    What is a collateral mortgage?

    A collateral mortgage is a type of mortgage that lets you borrow more than the mortgage amount if the value of the property rises. It means that you can borrow more without refinancing the loan. It’s an increasingly popular option and most lenders offer both conventional and collateral mortgages.

    A collateral mortgage requires the lender to register your home or property with a collateral charge. In most cases, this registration is done for a higher amount than the loan amount applied for. Once registered, you will be allowed to take money from your property whenever you need it without having to apply for refinancing.

    Borrowing more money is very easy because the funds are pre-approved. You will not be asked to pay any additional charges to access more money. That is the case with refinancing. This is one of the major reasons why so many people choose this type of mortgage.

    There are many parallels between this arrangement and a Home Equity Line of Credit (HELOC). With a HELOC, you are allowed to continue to borrow money against your property’s equity for as long as you don’t borrow more than the initial mortgage amount. With a collateral mortgage, however, you can borrow more than the original mortgage amount if your property’s value has increased.

    Collateral mortgages versus conventional mortgages

    The main difference between a collateral mortgage and a traditional mortgage is in the terms and conditions of the agreement. A collateral mortgage can agree to let the borrower access more than the negotiated amount. A conventional mortgage is only registered as the total borrowed amount. Another way to look at is that a collateral mortgage has a variable principal amount and a conventional mortgage has a fixed principal.

    If you apply for a $500,000 traditional mortgage loan, for example, the lender would only register $500,000 as a liability. This amount can go up to 125 percent for collateral mortgages.

    How to calculate your collateral mortgage?

    It is important to understand how to calculate your collateral mortgage so you can fully comprehend the financial aspects of your mortgage.  Your lender might have the option to register your mortgage for up to 125 percent of your property’s value, based on the terms and conditions of your agreement. Here’s how to calculate your available equity and collateral mortgage amount:

    Start by Finding your property’s registered value

    You’ll find your property’s registered or assessed value on your most recent property tax bill. Once you have that number, the rest is very easy to calculate. Start by taking the assessed value and multiply it by the maximum loan-to-home value. Let’s say the home value is $200,000 and the maximum loan-to-value ratio is 125 percent. Here’s how you will calculate your property’s maximum registered value:

    $200,000 x 125% = $250,000

    This is your home’s maximum registered value. Some lenders may have a lower value as not all lenders will register your property at 125 percent.

    Calculate your equity

    This can be a little tricky but it is important to be able to know exactly how much you can afford to borrow. There are mortgage qualifier calculators to help you find out what you can reasonably afford. Let’s assume you can not borrow more than 70 percent of your maximum registered home value and you have only $100,000 left on your mortgage. Next, use this formula to calculate your equity:

    Maximum registered home value x maximum loan-to-value ratio

    $250,000 x 70% = $175,000

    Now, subtract the amount that you still owe on your home from this number.

    $175,000 – $100,000 = $75,000

    In this case, your available equity is $75,000.

    Collateral mortgage: the Pros

    A collateral mortgage has both pros and cons. As a homeowner, you should compare all your mortgage options and pick the one that offers you the best deal. Here are some of the pros and cons of a collateral mortgage to help you compare:

    • A collateral mortgage makes it easier to borrow money in the future. You will not have to go through the trouble of refinancing your loan if you ever need more money in the future. Hence, it can prove to be a great time saver as well.
    • You can save a lot of money as you will not have to worry about refinancing fees that can run into the hundreds of dollars
    • You will have the option to access more money as the value of your house increases.
    • A collateral mortgage can improve your financial standing as you will be able to easily access funds and use them as you want, i.e.: to get rid of high-interest debt or renovate your house.

    Collateral mortgage: the cons

    • A collateral mortgage does let homeowners change to another lender. You will be stuck with the same lender even after the end of your mortgage term as the agreement is not registered with the registry office.
    • You have to pay a variety of legal fees including discharge fees and registration fees if you choose to switch lenders at your renewal period. In addition, you a real estate attorney, which can be quite expensive.
    • You can lose your property if you consolidate unsecured debts into your mortgage or HELOC or mortgage, and fail to make timely payments.
    • Beware the lure of easy money. It’s tempting and homeowners may continue to withdraw funds without realizing the consequences.

    How to Apply For a Collateral Mortgage

    It is easy to apply for a collateral mortgage but it’s not a one-stop process. The first step is to calculate your down payment. Next, find a house and negotiate a price.

    Let’s assume the house you want costs $400,000 and you can make a 20 percent down payment, i.e.: $80,000. This means you will need a $320,000 mortgage. Since lenders often offer a collateral mortgage up to 125 percent of the value of the property, your registered mortgage can cover up to $500,000.

    This is not a guarantee since not every lender will cover 125 percent of your home’s value. The criteria differ from lender to lender. Even for a collateral mortgage, some lenders may not go above the property’s total mortgage amount. A collateral mortgage can be very useful in situations where your home appreciates in value. Once the value of your property increases, you will be able to borrow more.

    Let’s say you bought your home about 10 years ago and that it’s now worth 10 percent more. If the original price was $400,000, your house would be worth $440,000 today. We’ll assume you cannot borrow more than 80 percent of your home’s value, which is $352,000. Since you have been making payments, we’d say you now only owe $250,000 on your property.

    Based on this information, we can calculate the equity on your home:

    $352,000 – $250,000 = $102,000

    This is the amount you have in equity, i.e.: the amount you can borrow. This amount will continue to increase if your house continues to appreciate in value. The more it increases, the more money you will be able to borrow but the amount will be capped at 125 percent of the property’s original value, which in this case would be $500,000.

    All in all, collateral mortgages are easy and affordable. They give you quick access to funds without having to pay any fees. Choose a reliable lender and make sure to manage your finances well.

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    Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications