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What is Collateral Mortgage?

Collateral Mortgage

Collateral mortgage refers to a type of mortgage where the loan agreement is secured by collateral. There are lenders that offer a borrower’s ability to register collateral for a mortgage up to 125 percent of the mortgage value. This allows a borrower to borrow more funds from the same lender. The amount borrowed the second time is limited and cannot exceed the registered amount when approved without registering an additional mortgage. Once the mortgage repayment term is up, most borrowers have the option to switch the mortgage form one lender to another to take advantage of lower interest rates. This can only happen in situations where the mortgage is registered as conventional.

Disadvantages of a Collateral Mortgage

One of the major disadvantages of collateral mortgage is that lenders are always reluctant to switch or transfer collateral mortgages. If a borrower wishes to shift from one lender to another, he or she is forced to discharge the mortgage and pay for registration of a new mortgage. This nullifies their power as consumers to take advantage of more competitive interest rates that those offered by the current lender. Lenders can also apply the law to use collateral placed on a mortgage to pay other outstanding debts that a borrower may be having with them. Where a borrower has equity and they have defaulted on credit card or a different loan, a lender may raise their collateral mortgage so they can clear such debts. Also, in case a borrower desires to refinance a mortgage in order to consolidate their debts or renovate their house and the current lender refuses to approve their request, the borrower cannot approach a new lender. This is because where the lender has secured a borrower’s home through collateral mortgage, no equity is available to secure another loan request. It is advisable that borrowers do due diligence to establish what a lender is offering in advise. Borrowers should find out whether they are offered a conventional or collateral mortgage.

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Posted by on Oct 17th, 2014 and filed under Finance & Investing. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.