Choose conventional mortgages: they’re cheaper with fewer hassles
Today, some financial institutions offer collateral mortgages instead of conventional mortgages for new home loans. It’s important to understand the differences between the two because the type of mortgage you choose can have lasting implications for your financial security plan.
Conventional mortgage
A conventional mortgage is registered against a property – usually the loan is secured by your house. Also, your property’s value determines how much you can borrow. With a conventional mortgage, if you make your payments on time you can renew your mortgage and after a period of time, pay off the balance. Under normal circumstances, the principal balance on a conventional mortgage goes only one way – down.
Collateral mortgage
A collateral mortgage is a loan backed by a promissory note, which in turn is backed by security – a mortgage against your property. This allows you to receive new funds without refinancing your mortgage thus saving on administrative and legal charges. In some cases, a collateral mortgage can total as much as 125 per cent of a property’s value.
Collateral mortgages more costly
If you want to refinance, you can benefit from a collateral mortgage. However, collateral mortgages can be a problem at renewal time. If you have a collateral mortgage and you decide to transfer your mortgage, you could face numerous fees to transfer the mortgage to another lender. You’ll need to discharge your current mortgage and register a new mortgage, which generally involves substantial costs. With a conventional mortgage, many lenders allow you to switch it to another lender for little to no cost.
Selling a home with a collateral mortgage can also be painful. What if you’ve borrowed more than the value of your home? For example, your home is worth $200,000 and a few years later you sell it for $224,000. However, your collateral mortgage is worth $250,000. This situation can create a shortfall. Will your financial institution provide you with a loan to cover the difference without the backing of the property? Maxing out your lending amount, could put you in this situation.
The financial institution may also change the collateral loan’s interest rate if you miss a payment. Collateral loans also allow lenders to seize the equity in your home above the mortgage balance to collect on a loan in default. If you miss a payment with a conventional mortgage, there are standard procedures for catching up on the missed payment.
While competition among lenders provides you with choice, collateral mortgages could be seen as an attempt by lenders to keep you for life. It’s important you ask the right questions and, in this case, you should ask, “Am I getting a conventional mortgage?”