What Are Collateral Mortgages?

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Let’s add another term to our mortgage vocabulary: collateral mortgages.

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What are they?

In its simplest form, a collateral mortgage is a re-advanceable mortgage. That means your lender has the ability to lend you more money as your home appreciates.

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How?

They do this by registering your home with a collateral charge which is typically higher than the actual mortgage amount you borrow from a lender.

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Why would I get a collateral mortgage?

It enables the bank to lend you additional money without having to incur additional fees and go through a full-blown refinance process. It’s as if they’re anticipating your need for additional capital in the future and baking it into your current mortgage approval to make it simple downstream.

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There’s a catch, right?

A collateral mortgage definitely has its advantages, but it isn’t perfect. If you decide to tranfer your mortgage to another bank, you’ll incur additional fees to “discharge” the collateral mortgage from your current lender (which is uncommon in traditional mortgages). Another impact of a collateral mortgage is that it will technically look like you have more debt on paper than you actually do, simply based on the dollar amount your lender registered the loan for.

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For example, let’s say you get a mortgage approval for $400,000 from Bank A. If it’s a collateral mortgage, the bank can register the mortgage amount for up to 125% of your actual mortgage, meaning they could register an originally $400,000 mortgage at $500,000. Although you haven’t used any of the additional amount that’s been registered, it could still potentially impact any external financing you seek approval on.

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Got a question? Don’t hesitate to reach out. It’s always worth a conversation to see if a collateral mortgage is the right decision for you.