In recent years, many have unknowingly taken out an umbrella mortgage to finance the purchase of their home. This mortgage product is now so common that some financial institutions have even limited their mortgage offerings to umbrella mortgages. Despite its frequency, this product, also known as a subsidiary mortgage or real estate security deed, remains little known to the general public who are more familiar with so-called traditional mortgages.
Traditional mortgage or umbrella mortgage?
As part of the purchase of a property, the traditional mortgage allows a lender to ensure payment of the loan granted to you by retaining a right to the property that is mortgaged until the loan is repaid in full. In principle, the property is mortgaged only for the amount of the loan granted by the lender.
The umbrella mortgage allows the lender to retain a right to the property not only for the amount borrowed to acquire it but also for other current or future debts contracted with the same lender. Thus, the property guarantees not only the loan granted for its purchase but also other loans that the lender may make or have made such as a line of credit, a credit card, a personal loan, a car loan, etc.
Benefits of umbrella mortgage
An umbrella mortgage is an interesting tool if you want to:
Have easier access to credit
Have a permanent borrowing capacity subject to certain conditions set by the lender;
Save notary fees and registration fees since there is no need to sign new deeds of guarantee to borrow new amounts with the same lender;
to get a particularly low-interest rate.
Disadvantages of the umbrella mortgage
Despite an often more attractive interest rate, you should be aware that:
This facilitated access to credit increases the risk of over-indebtedness;
The umbrella mortgage is listed on the Land Registry for an amount equal to or even greater than the total purchase price of the home, which may reduce your ability to use the value of your building to borrow money from another lender;
such a mortgage remains in effect despite the repayment of the amount actually borrowed to buy the property. In the event of an early sale of the term, either before the end of the term, a release (a letter in which a lender certifies that you are free of your debt to him) may be more difficult to obtain, since you will first have to repay not only the the entire amount borrowed for the purchase of the property, but also other debts that may be incurred;
As part of joint purchases, a spouse may have to repay all of the debts incurred by the other spouse in order to sell the property in the event of separation.
In conclusion, when negotiating your mortgage, it is important to ask yourself about your real financial needs before opting for an umbrella mortgage or a traditional mortgage. Umbrella mortgages certainly give you easy access to credit, but in return, they bind you more to the creditor than traditional mortgages. Ask your mortgage broker for advice on which option is best for you.