What is a Collateral Mortgage?

What is a Collateral Mortgage?

When shopping for a mortgage, you may come across this term: collateral mortgage. Some people may tell you it is a good option, others will be of the opinion it is a great disadvantage.  Just like every other option when it comes to mortgages, do your homework, be informed and then decide if it is the right option for you.

To begin, let’s understand what a collateral mortgage is all about. 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. It is commonly known as security as it offers security to the lender and is provided by the borrower.  Your mortgage is registered with a collateral charge by your lender. This will allow you to borrow money from your home at any time, without having to refinance your mortgage.

Don’t forget that, in a general sense, a number of assets can act as collateral. In this case, your house is the collateral. The lender needs to see that there is sufficient insurance in place when financing their purchase; in other words, he needs to verify he can collect on amounts owing. This is usually done through resale or power of sale. So, the advantage of having a collateral mortgage is really the flexibility to borrow money from your home at any time, as well as having the ability to avoid the legal costs associated with refinancing.

On the other hand, it is important to understand that with a collateral mortgage, it cannot be transferred to another lender, not even at the end of your mortgage term. If you do decide to switch to another lender, even if your mortgage is up for renewal, you need to pay legal fees as you will need to hire a real estate lawyer to help get you out of your collateral mortgage agreement.

If your offer on a home is accepted and the home inspection is passed, you sit down with a mortgage broker. The professionals from The Costa Group will get your mortgage financing ready and will explain to you how a collateral mortgage is calculated.