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Collateral Mortgage

Definition of 'Collateral Mortgage'

A collateral mortgage is a type of loan secured against the borrower's property (home) through a written note of indebtedness such as the Promissory Note. It is usually seen as an extra security for the lender in case the borrower defaults on the loan.

Understanding Collateral Mortgages:

When the bank gives you the option of going for a conventional mortgage or a collateral mortgage, the main issue would be first to understand what the difference between the two is.

How is collateral mortgage different from traditional mortgage:

In short, a conventional mortgage gives the borrower access to a set loan amount with a fix interest rate, payable during an agreed period of time. A collateral mortgage is similar in many respects to a conventional mortgage (as it comes with an agreed interest rate and term), but the lender starts out with the idea that the borrower might want to borrow more money in the future under the same agreement and this is why up to 125% per cent might be charged on the value of the property. As a result, the collateral mortgage registered will be higher than the loan amount received by the borrower.

For example, if you would like to buy a home worth $300,000 with a 20% down payment, you'll have $240,000 in conventional mortgage at, let's say, 3.5 % rate, payable in 25 years. With a collateral mortgage, the loan amount will still be $240,000, but the mortgage registered will be $375,000.

Example:

Here's a real-life example from one of the properties researched on PropertyShark:

References:
http://www.special-loans.com/dictionary.asp?t=collateral_mortgage
http://www.mortgagewisefinancial.com/node/109

Disclaimer:
The glossary is intended to provide real estate professionals and home buyers with a basic understanding of various specialized terms related to legal rights over a property. All terms appear in public records such as ACRIS. We do not take responsibility for the legal accuracy of the definitions provided and ask that use of these explanations in a legal setting be made only after checking with a lawyer or another specialist in the field.