Borrowers are typically offered one of two types of mortgages: a traditional mortgage or an umbrella mortgage (known in the business as a collateral mortgage). In addition to financial institutions, other people or companies can offer loans secured by mortgage (alternative loan or private loan).
With a traditional mortgage, the property is mortgaged only for the amount of the loan granted by the lender. For example, if you buy a property worth $300,000 by borrowing $270,000, the mortgage will be $270,000.
A traditional mortgage doesn’t secure other types of credit such as a home equity line of credit. However, you could register a second mortgageA second mortgage is an additional mortgage on the same property. This mortgage can be granted by the same lender as for the first mortgage or by another lender. The interest rate charged on a second mortgage is often considerably higher than on a first mortgage. This is because the second mortgage lender is repaid after the first mortgage lender if ever you’re no longer able to pay. The second mortgage lender is therefore at greater risk of not being paid back. Fees may apply, and the lender could refuse to lend you an additional amount if, among other things, you don’t meet its requirements for obtaining a loan. in order to borrow more money.
The umbrella mortgage is also known as a collateral mortgage, wraparound, mortgage security deed or equity release.
An umbrella mortgage gives the lender a much broader right than a traditional mortgage. Its right in the property covers not only the borrowed amount, but also any other current or future debts you may contract with the lender, such as a line of credit, a personal loan or a car loan. The other debts each have their own contractual terms, such as their own interest rate.
Some financial institutions offer only umbrella mortgages.
There are both pros and cons to umbrella mortgages. Before deciding on a mortgage, be sure to compare several offers and ask questions that will help you understand what is being offered to you.
- Can make it easer to obtain credit such as a home equity line of credit by leveraging the value of a residential property.
- Can provide lower interest rates for loans covered by mortgage security.
- Makes it possible to secure several loans without your having to have the mortgage re-registered by a notary, because the security can be reused up to the maximum allowed amount.
- Easier access to credit can lead to overborrowing.
- If the loan involves several co-borrowers, an umbrella mortgage secures all the current and future debts of each co-borrower. You could therefore be held liable for debts that did not exist when the contract was signed. The same is true if you endorse someone who takes out an umbrella loan (guarantee).
- Before finalizing the sale of your home and obtaining a mortgage discharge, you may have to repay all the debts you’ve contracted with the institution, since the loans it granted are covered by the umbrella mortgage.
- Changing lenders when the term expires may be more difficult because all the loans granted by the institution are secured by an umbrella mortgage. When renewing your mortgage, you may lose some of your power to negotiate credit terms. A borrower with a good credit report and a solid financial situation can often get a lower rate.
For more information, refer to the guide guide 99 trucs pour économiser sans trop se priver (pdf - 6 MB)Updated on 24 May 2017 (in French only).
A private mortgage loanA mortgage loan is a loan for which property serves as collateral for repayment. is a loan entered into between two parties without the involvement of a financial institution. In brief, an individual or business with cash assets agrees to grant a loan to another individual or business, which is usually asked to give the lender a mortgage on property as collateral.
The property must therefore have a certain equityThe equity in the property is the difference between the property’s market value and all debts secured by that value. For example, if your property is worth $300,000 and you still owe $180,000, the equity is $120,000. (market value in excess of the loan amount).
The interest rate and other terms of a private mortgage loan
Private lenders tend to charge higher interest ratesAn interest rate is the percentage applied to an amount that is invested or borrowed; it enables you to calculate the interest earned or the cost incurred on this amount for a given period.
For example, a $1,000 investment bearing 6% interest per year will earn $60 in interest per year. than financial institutions, mainly because the risk of non-payment is higher. Individuals will often deal with a private lender because a financial institution will not agree to loan money to them. A private mortgage loan, in many cases, is taken out to provide temporary financing until the borrower’s financial situation improves and money can be borrowed again at a lower rate from a financial institution.
Key loan terms include the time when the loan and applicable fees, including lender’s and brokerage fees, will have to be repaid.
Before you go looking for a private loan
Make sure you review your situation with a representative from your financial institution. If a private mortgage loan seems to be the only medium- or short-term solution:
- Read all the terms of the agreement; don’t just look at the interest rate. Demand that the key provisions mentioned when negotiating the loan are written into the agreement. Don’t rely on verbal promises.
- Also make sure you’re clear on what will happen when the agreement ends. For example, if the contract states that you will be required to repay the loan within six months, will you actually have the money to pay it back? What will happen if you can’t?
- Ask the lender about file opening fees, closing fees and other applicable charges.
- If you need to, hire an independent legal advisor to help you with such things as interpreting the terms of the agreement.