Are you familiar with umbrella mortgages?

In recent years, many people have unknowingly taken out an umbrella mortgage to finance the purchase of their homes. This mortgage product is now so common that some financial institutions have even limited their mortgage loan offers to umbrella mortgages. Despite its frequency, this product, also referred to as a collateral mortgage or a mortgage security deed, is not well known to members of general public who are more familiar with the so-called traditional mortgages.

Traditional mortgage or umbrella mortgage?

For the purchase of an immovable, the traditional mortgage allows a lender to ensure the payment of the loan granted by maintaining a right in the mortgaged property as long as the loan is not fully reimbursed. In principle, the property is mortgaged only for the loan amount granted by the lender.

The umbrella mortgage allows the lender to maintain a right in the property not only for the borrowed amount of purchase, but also for other current or future debts contracted with the same lender. Therefore, the property does not only secure the loan granted for its purchase, but also the other loans that the lender may grant or have granted such as a line of credit, a credit card, a personal loan, a car loan, etc.

Advantages of umbrella mortgages

The umbrella mortgage is an interesting tool if you would like to:

• have easier access to credit;
• have a permanent borrowing power subject to certain conditions set by the lender;
• Save notary and registration fees because there is no need to sign new guarantee deeds to borrow new amounts with the same lender;
• Get particularly low interest rates.

Disadvantages of umbrella mortgages

Despite a more attractive interest rate, you should be aware that:

• this easier access to credit reinforces the risk of over-indebtedness;
• the umbrella mortgage is registered in the land register for an amount equal and even higher than the total purchase price of the home, which can reduce your ability to use the value of your property to borrow money from another lender;
• such a mortgage loan remains in force despite the repayment of the amount actually borrowed to buy the property. In the event of an anticipated sale of the property, i.e. before the end of the term, a release (a written notice in which the lender attests that you are released from your debt) can be very difficult to get since you should first repay not only the full amount borrowed to purchase the immovable, but also the other contracted debts;
• For joint purchases, a spouse may have to reimburse all the debts of the other spouse to be able to sell the property in case of separation.

To conclude, when negotiating your mortgage, it is important to ask yourself about your actual financial needs before opting for an umbrella mortgage or a traditional mortgage. Umbrella mortgages allow you an easier access to credit, but they bind you more to the creditor than traditional mortgages. Seek advice from your mortgage broker to help you choose the option that best suits your needs.

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