Room of Oran | Using a House as Loan Collateral | Business

QUESTION: I saw your article in the newspapers about using your house as collateral, and I would like to know which banks allow it and your comments on it.

— Coote

FINANCIAL ADVISOR: There are several lending institutions, primarily building societies, banks, and credit unions that provide home equity loans, which are loans secured by the value of a residential property.

They are called equity loans because they are granted against the owner’s equity in the property. Owner’s equity is the difference between the value of the property and the debts the owner has on the property.

Let me illustrate: if you bought a property for $20 million and borrowed $16 million to do so, your equity in the property would be $4 million. If, five years later, its value increased to $25 million and the mortgage balance decreased to $14 million, your equity in the property would be $11 million.

The $11 million represents value that you can take advantage of to improve your financial situation if used wisely, provided, of course, that you can qualify for a loan and can repay the debt in a way satisfactory.

A home equity loan can be obtained on a property on which there is no loan as well as on a property on which there is a loan. Loan officers are able to tell how much you are eligible to borrow.

Lending institutions vary in the policies that guide how they lend, including the amount they lend, the term of the loan, the rate they charge, and what they lend for. The amount they are willing to lend is a percentage of the property’s market value and the maximum varies by lender.

However, there are cases where the maximum amount that can be borrowed is a fixed dollar amount, which may be less than the maximum expressed as a percentage. So even though your property might have a market value of $30 million and the maximum allowable percentage is 85%, the maximum you could borrow would be $15 million if that’s the maximum allowed, not the $25.5 million which would equal 85 percent of the value of the property.

Where there is an existing mortgage on the property, the maximum amount you can borrow is considered taking into account the amount already owed. As a general rule, it is easier to obtain the equity loan from the institution which granted the first loan, and certain lenders tend not to accept that their debt is classified after that of another lender.

Risk appetite

The property used to secure the loan can be the one you live on, it can be used by you as an investment, and it can even be owned by a third party, which means someone would risk their property for you.

Some of the purposes a home equity loan can be used for include home improvement, including repairs and expansion to increase the value of the property, funding education to improve the recipient’s ability to earn a better income, debt consolidation to reduce the cost of servicing more expensive debt and financing medical expenses.

Some more daring people may even take the risk of borrowing for funds to invest if the lender is willing to lend for this purpose.

Lenders generally require the following to make such loans: registered title to the property, a recent appraisal of the property, a recent land surveyor’s report, proof that property taxes and utility charges are up-to-date statement or invoice to support the use of funds. , a report on the condition of the existing mortgage, if there is one, and approval of the construction by the competent authorities if the funds are to be used for the expansion.

Lenders may require other documents and also require borrowers to provide proof of identity using a government issued document which may be so used, proof of income, proof of address and a tax registration number.

The borrower is also required to pay all relevant costs incurred, just as in the case of a first mortgage, for example, government fees and the cost of the surveyor’s report. It is important to note that the lending institution will register a mortgage on the property to protect its interests.

Home equity loans offer a way to use your untapped equity in a very valuable asset to increase your wealth. It should be used responsibly to finance projects that can yield long-term value and not so much to feed short-term desires, the benefits of which pass long before the loan is liquidated.

Repaying these loans should also be a priority, lest they default, which could result in the loss of a very valuable asset and a decline in your wealth.

– Oran A. Hall, author of Understanding Investments and lead author of The Personal Financial Planning Handbook, offers personal financial planning advice and guidance. [email protected]