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If you are looking to finance your home purchase, you will come across all sorts of options. At some point or the other, you will be wondering which one should I pick? Among these options, two types of financing options or mortgages you will hear will be a collateral mortgage and a conventional mortgage.
So, the question is, what are these types of home loans and how do they compare against each other? Let’s first start with a collateral mortgage.
What Is A Collateral Mortgage?
A collateral mortgage is a mortgage product that is re-advanceable. It means, the lender can loan you more as your home value increases without any need of refinancing your home loan. In such a case, the lender will register your property with a collateral charge, mostly for a higher amount compared to the loan amount required.
Once the property is registered with a collateral charge, you are allowed to borrow money from your home at any time. This is similar to a home equity line of credit (HELOC) which enables you to borrow against your home’s equity any time you want, as long as you are within the limit.
This type of home loan gives your lender secondary security and a lien against the property for the entire amount registered. This amount can be as high as 125% of the value of the home.
How to Calculate Your Collateral Mortgage?
Let’s find out how you calculate your collateral mortgage amount and the equity you have available.
1. Know the Registered Home Value
To calculate the registered home value of collateral charge mortgage, take the home value and multiply it by the maximum loan-to-home value. For instance, your home value is $500,000 and your max loan-to-ratio is 125%, then your registered home value will be $625,000.
2. How Much Equity Do You Have
To calculate how much money or equity you can borrow, you will need the following formula. Max registered home value multiply the max loan-to-value ratio; and minus it from the amount owed on the mortgage.
Pros & Cons of A Collateral Mortgage
Easy to Borrow Money: The main advantage of a collateral mortgage is that you can borrow money easily. Plus, the money is also affordable to get in the future from your current lender.
Avoid Fees: Since you do not have to refinance the mortgage in collateral, you won’t have to pay any fees associated with paying a real estate lawyer that would be required if you had to refinance your mortgage.
You Can’t Transfer Mortgage: It is important to know that you cannot transfer a collateral mortgage to another mortgage lender. It is not possible even when your mortgage term ends because the agreement is not registered with the registry office. Also, other lenders might not agree to the current terms that are present in the mortgage documents.
You Have to Pay to Switch Lenders: At any point, if you decide to switch your lender, you will have to pay the legal fee, even if you have reached your mortgage renewal period. In order to change lenders, a real estate lawyer would be required to help you to rule out the collateral agreement, which will cost you money.
What is a Conventional Mortgage?
If you can come up with at least a 20% down payment, then you are eligible for a conventional mortgage. In a conventional mortgage, no more than 80% of the appraised value of a property is loaned out. So, if you can’t put at least 20% down, you should seek other alternative options.
If you want to borrow more than 80% of the appraised value of the home, then your mortgage is a high-ratio mortgage. This mortgage refers to the percentage of the borrowed funds compared to the home’s value. The home loans can be approved with as little as a 5% down payment. It is worth mentioning here that the down payment for conventional mortgages cannot be borrowed money.
Pros of Conventional Mortgage
One of the main advantages of taking a conventional mortgage is that you will not have to pay the extra premium for CMHC insurance. This type of policy protects lenders when loaning out funds to borrowers who need more than 80% home loan for their home purchase.
Know that the higher the ratio on the mortgage is, the higher the risk that the borrower will default on their payments. So, the lenders want a guarantee that in the event that a borrower defaults, they will be reimbursed for the money loaned out.
Another advantage of a conventional mortgage is that you will have access to equity in the property that you just purchased. This is because you are making a bigger down payment. If you need to use the equity in your home for a large purchase, you are eligible to do so via a home equity line of credit (HELOC). The bank will consider you a much lower risk because of your equity in the property and may agree to approve you for financing arrangements like these.
Comparison of Conventional And Collateral Mortgage
The major difference between both mortgages is in the terms and conditions. Lenders are able to write in agreement the higher interest rate with a collateral mortgage as compared to what they were offered in a conventional mortgage.
With a conventional charge, the amount of the home loan is registered against the property. If you borrow $100,000, your lender will register $100,000 as a liability on your home. However, with a collateral charge, a higher amount than the home loan can be registered against the property.
The Bottom Line
Before agreeing on any type of mortgage, it is wise to take essential advice, especially when you are unsure about the terms and conditions of mortgages. This will help you make a better decision that will help you for many years to come.
At Lionsgate, we specialize in helping people with better financial advice. If you want to get the extra cash, obtain funding for private mortgages, as well as for other real estate transactions, we are here for you. If you are looking to buy land in Canada, get a mortgage or apply for a loan, fill out the form below. Or, You can leave us a message and we will try to connect you with local lenders and sources that best meet your needs.
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