What Is a Collateral Mortgage?

Homeownership can be a budget-shredder, which is why products like collateral mortgages exist.

A collateral mortgage involves getting access to both a mortgage and a fixed amount of additional credit at the same time, with your home acting as the collateral for the entire amount

If you need to pay for potentially costly home renovations, car repairs or even tuition, a collateral mortgage can provide access to the cash you need.

How does a collateral mortgage work?

You can generally think of a collateral mortgage as two loans in one: your home loan plus an additional dose of credit you can access in the future.

The lender registers the entire amount with your local land registry, but you’re only required to pay back the mortgage amount and whatever portion of the extra cash you actually spend.

By registering the full borrowed amount, collateral mortgages can eliminate the need for a separate transaction, like applying for a home equity line of credit or a mortgage refinance, and the fees that might come with it.

Types of collateral mortgages

There are essentially two types of collateral mortgages:

Collateral mortgages vs. conventional mortgages

With a conventional or “standard charge” mortgage, only the amount of your mortgage is registered. If you need to access home equity later, you’ll have to formally apply for a separate loan product, re-qualify for the additional funds and register a new mortgage. You’ll likely have to pay fees to your lender along the way, as well.

Most lenders offer both conventional and collateral mortgages; some will even allow you to secure other loans using a “collateral charge mortgage”, where the home acts as collateral for other financial products, such as an auto loan or line of credit.

Pros and cons of a collateral mortgage

Example of a readvanceable collateral mortgage

Let’s assume you’re purchasing a property for $500,000 with a 20% down payment worth $100,000. That means you’ll need a $400,000 mortgage.

Your lender offers you a collateral mortgage of up to 125% of the value of your home, and registers it with a value of $625,000 ($500,000 x 1.25). This is the maximum amount you’ll be able to borrow, although you can legally only borrow up to 80% of the appraised value of your home, minus what you still owe on your mortgage.

Ina few years, it’s time to replace the HVAC system and you need some cash to pay for it. Will your collateral mortgage cover the $15,000 you need?

As a readvanceable loan, the amount you can borrow increases as your mortgage shrinks and your equity builds. In the example above, if you had paid off an additional $10,000 of your mortgage, you’d be able to borrow $100,000.

But no matter how much your home appreciates or how quickly you build equity, the most you will ever be able to borrow is the $625,000 approved at the outset of your collateral mortgage.