What is a Blanket Mortgage?
Similar to a traditional mortgage, where the loan is secured against one property, a blanket mortgage secures one loan against multiple properties. Unlike a traditional mortgage the loan is paid off when the property is sold, a blanket mortgage can remain in priority when one or more of the blanket properties sell. Blanket mortgages are often used by real estate investors, developers, and fix-n-flippers. At times, the cost and efficiencies of a blanket mortgage are much friendlier than attempting to finance multiple mortgages against multiple properties. We believe the greatest advantage of a blanket mortgage is the fact that you can leverage existing equity to purchase additional real estate.
Homeowners Can Use a Blanket Mortgage
When your current home isn’t listed, or sold, or is sold but not closing before the purchase closing date of your new home, you will require a bridge loan. A bridge loan is technically a blanket mortgage in the sense that one loan is secured against two pieces of real estate. In the case of a bridge loan, when your existing home sells, you will use the sale proceeds to pay down the bridge loan. The blanket mortgage charge will also be partially discharged from your old home that sold, and a mortgage charge will remain on your new home.
Real Estate Investor Can Use a Blanket Mortgage
Often times real estate investors will take advantage of their existing property equity in order to purchase another property using little-to-no down payment. Assume that you have an existing rental property in Scarborough that is worth about $750,000 with an existing first mortgage of $250,000. You have your eye on a duplex in St Catharines that is being sold well under market value and you want to hop on the opportunity. Although your evidence suggests the value is more, the purchase price is $350,000. If you are working with an experienced mortgage broker they should be able to provide you with 100% financing, or what is known as a no-money-down mortgage. Your mortgage broker would approach your financing requirement and work on structuring a first mortgage of $350,000. This $350,000 will be registered in 1st position on the St Catharines duplex and blanketed in 2nd position behind the existing first of $250,000 on your Scarborough rental property. On one hand, your lender will be providing 100% financing, or 100% loan-to-value on your purchase, however, on the other hand, your lender has the security of the equity in the Scarborough rental property. Technically, the aggregate, or average loan-to-value is only 54.54% ($350K + $250K / $350K + $750K). As for real estate investors who purchase fix-n-flip homes, the above gameplay works just the same. Once the renovations are completed to the St Catharines duplex, the property will be sold, the blanket mortgage will be entirely discharged from both properties. Say the duplex ends up selling for $400,000 after the renovations, you will net the proceeds after real estate commission and discharging the blanket mortgage.
You must also keep in mind that if you default on your blanket mortgage, the lender will have the ability to enforce their security against all real estate assets under the blanket. Another risk becomes the chance that there might not be takeout financing available if your mortgage lender decides to call, or not renew your blanket mortgage. Especially if values drop, if there are mortgage arrears, if the properties under the blanket are unique or rurally located. However, the same can be said for basically any traditional mortgage – the risk of default and exit are always points to consider before entering into any mortgage facility.