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).

The traditional mortgage (conventional mortgage)

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.A 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

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.

PROS

  • 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.

CONS

  • 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).