The Collateral Loan


This month, I wanted to focus on something that I believe every real estate owner should be aware of: the collateral loan.

In April, I invited Desjardins to speak to our team about their perception of the market, and to provide an update for us on the various financial products they offer, as I do with many lenders throughout the year. 
During the course of the meeting, something caught my attention: The collateral loan. And, although this product is not new, and I’ve been aware of it for several years, it struck me that I should delve deeper into its advantages.

The collateral loan is exclusive to Desjardins, and I want to emphasize that I have no affiliation with them, nor are they sponsoring this newsletter. With that said, I feel compelled to share this because occasionally they offer products that no other lenders make available. It’s almost like having a generous uncle who provides favourable terms to help you get started.

What exactly is a collateral loan? 
In simple terms, it involves freezing a portion of the equity in your primary residence and considering it as the down payment for a second property you wish to purchase.

For example:
Let’s say your property is worth $600,000, and your current loan balance is $300,000. 
You would like to buy a rental property valued at $700,000, and saving for the conventional down payment of 25% ($175,000) seems like a daunting task. 
Desjardins steps in by freezing your equity, up to 80% of the value of your current property, which in this case would be $180,000 and would be enough to cover the down payment. 
The mortgage that you would get on the rental property would then be for the full amount. 
Of course, both the property and your rental income must qualify for the $700,000. 

This strategy allows you to leverage the equity sitting in your property and generate profits from it. 

Essentially, the $175,000 you’re tapping into serves a dual purpose: it acts as equity in your primary property, considering your mortgage is only $300,000, and acts as a guarantee, allowing you to buy another property without having to save for a down payment. 
You would aim for the rental property to at least break-even with this mortgage; but the real bonus comes in when you start making extra cash flow, and you pay down capital on your loan each month.

The reality is: Getting started in real estate investment can be challenging, especially when you’re saving up for a down payment from your salary’s earnings. You might need to earn upwards of $300,000 in income, and meticulously save, for years. However, with this approach, you can enter the market earlier, and begin your journey towards establishing a secure financial future, through real estate.

It’s not always about acquiring what you don’t have. Sometimes, it’s about utilizing what you already possess, wisely.

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