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The AC Lending Weekly

Collateral vs. Conventional Mortgages

Mortgages can be confusing. Ultimately when you enter a mortgage agreement, the lending institution places a charge against the title of the property, this is the amount you agree to pay them back in the future. All the lending institution is doing essentially is protecting their interests until you are able to do so.

 

You need to be informed when taking out a mortgage at any lending institution. Some banks only offer a collateral mortgage while others give a choice between collateral and conventional. People often make a poor, uninformed choice because of the faster, cheaper closing process many banks offer. Making an informed decision on mortgage type comes down to the amount you will owe back in the end. With a collateral mortgage, you can choose to go up to 125% of your home’s value, whereas a conventional mortgage is registered at just the amount you currently owe. So which is the better choice?

 

A collateral mortgage is neither good nor bad, it all comes down your personal needs. This type of mortgage gives you access to future borrowing through a line of credit established for you, allowing you to avoid additional legal fees and having to register a new security in the future. In order to obtain these funds, you simply have to re-qualify (i.e. credit check, proof of employment, etc.). The structure of a collateral mortgage attaches any other debts you currently have to the mortgage. This can make it more difficult to move to a new lender upon renewal, and often causes a higher interest rate to be incurred. If you choose to sell the home while holding a collateral mortgage a large portion of your equity will go towards paying off the other debts. It also means that if you default on any debt you risk having your home enter foreclosure. If you do fall behind on mortgage payments, the lender has the right to charge a higher interest rate. These risks should be considered if you are at all worried about making all your necessary future payments.

 

So what type should you choose? There is nothing wrong with taking out a collateral mortgage if it fits your needs for future borrowing. The main thing to consider is the restriction of terms and conditions on your future planning and cash flow management. If you can see these things being restricted by a collateral mortgage then it may be better for you to choose the conventional mortgage. Unfortunately, much of this information is not disclosed at the time of signing. The key is that you understand the terms and conditions of the mortgage you sign for. If you are unsure of any item make sure to seek outside legal advice to prevent limiting yourself financially in the future.

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