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Everything You Wanted to Know About Collateral Mortgages

You may have heard of the term collateral mortgage or secured debt. In this article, we’re going to look at collateral mortgages and when a collateral mortgage can come in handy.

What is a Collateral Mortgage?

You should already be familiar with what a standard mortgage is. A collateral mortgage is a lot like a standard mortgage, except with a key difference. With a standard mortgage, the mortgage itself is the only security for the debt. That’s also the case with second mortgages and Home Equity Lines of Credit (HELOCs). That’s different from a collateral mortgage where the debt is actually a promissory note. As such, the mortgage is registered against your home to “collaterally secure it,” providing extra security for the mortgage.

What does this mean for you? Normally, with a standard mortgage, it’s only fully payable at the end of your mortgage term. However, with a collateral mortgage, it’s payable in full on demand.

In a perfect world, nobody would miss mortgage payments. As Canadians, we have a great track record of paying our mortgages on time. We prioritize paying our mortgage above everything else.

With a standard mortgage, if you miss a mortgage payment, you have the right to make it up. Your lender can’t just cancel your mortgage contract and sell your home. Your lender has to abide by the mortgage commitment you originally signed until the maturity date, not with a collateral mortgage.

If you miss a payment with a collateral mortgage, your lender has every right to call the mortgage right away, asking you to pay the principal and interest in full immediately. That’s not the only reason your lender can call the mortgage. If you miss a payment on your home insurance, condo fees or property taxes, your lender could call the loan, too.

Collateral Mortgages, the Good

As long as you understand what you’re signing up for, collateral mortgages can be useful to have.

A collateral mortgage comes in handy when you want to borrow equity from your property by way of a HELOC. In fact, a mortgage must be structured as a collateral mortgage to set up a HELOC.

To open a HELOC, you must have at least 20% equity in your property. If you meet that criteria and you have the income to qualify, it may be worthwhile applying.

A HELOC comes in handy as an emergency fund to consolidate debt and pay for home renovations. Because it’s secured by real estate (your home), it almost always comes at a much lower interest rate than unsecured debt, such as credit cards and unsecured lines of credit. You can expect to pay an interest rate of Prime plus 0.5% (2.45% + 0.5% = 2.95%) on a HELOC.

The Bottom Line

A collateral mortgage can be an excellent financial tool in your arsenal as long as you know what it is. If you’re looking for more information, speak to our mortgage experts to find out if it’s right for you.

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