Blanket mortgages: What they are, and how to use them
Multiple properties equals more income
Are you a real estate developer with a limited budget who wishes to invest in multiple properties? Do you want to shorten the lengthy process of applying for mortgages on a property-by-property basis? Then a blanket mortgage might be what you need. The mortgage plan, also known as a blanket loan, finances multiple real estate properties, simplifying and expediting the lending process. The same covered assets serve as the loan's collateral for added convenience. While commercial property owners most frequently use this type of loan, it is also favourable for residential landlords and property flippers.
How does a blanket mortgage work?
Much like standard mortgage plans, this mortgage also requires collateral- usually the property being refinanced. What differentiates the loan from the rest is the unique release clause that allows clients to sell a part of the properties covered by the mortgage and release them as a liability without obtaining a new loan. For example, real estate developers planning to purchase 50 acres of land and build on each acre start by buying land from various sellers, start construction, and later sell the houses. Each time a piece is sold, the developers use the proceeds to pay off a portion of the loan while keeping the mortgage.
Is it hard to get a blanket loan?
The application process is almost the same as getting small business loans, but more complex since the amount is significantly higher, ranging from $100,000 to $100 million. Moreover, lenders require a substantial down payment of 25% to 50%, making these loans less accessible. However, don't think that experienced professionals, real estate companies and seasoned investors will face the same challenges as a starting investor with almost no track record of any accomplishments in the industry. Investors with a good track record will always receive preferential treatment from large commercial lenders owing to their huge cash reserves, substantial assets, and sizable real estate portfolio. Notably, small banks and community credit unions are less likely to offer this type of mortgage.
What are the pros and cons of a blanket loan?
Always consider the advantages and disadvantages of a loan to determine if it's a good fit for you.
Advantages
Saves on time and money: Taking out a single loan to cover all your properties instead of taking a loan for every property helps cut down on costs in application and processing fees. A simplified process will also mean reduced time wastage.
Preferential rates: Applicants have access to more favourable interest rates than if they were to obtain loans for every property. In addition, they can negotiate better terms with a single lender than if they had to deal with multiple lenders for separate properties.
Increased pool of capital: Low interest rates free up capital that real estate investors can reinvest, buy property, or manage renovations.
Downsides
High risk: Since the covered properties are the collateral, there is a high chance that you will lose multiple properties if you default on your loan. The lender could demand control over multiple properties financed by the mortgage, a nightmare for any investor.
Complicated terms: Because it's a large loan, the risk to the financing institution is also great, hence more stringent qualifications.
High down payment: Unlike conventional mortgages, these loans typically have a higher value. Consequently, obtaining such a loan necessitates a sizable down payment, which is expensive for new investors.
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