09 Feb The Types of Property Secured Debt
Good debt. Bad debt. Household debt. High interest debt. Consumer debt.
There are an awful lot of “debt” terms thrown around nowadays. If you need to borrow money, you likely want to get the best possible interest rate. You also need a monthly payment you can afford. To do just that, some form of secured debt is likely your best choice.
Let’s start by clarifying what the term means. According to Investopedia, a secured debt is a “debt backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.”
So if you promise something you own as a guarantee you’ll pay back your loan, you have a secured debt.
Now, there are different types of secured debt. Today, let’s look specifically at property secured debt.
The first step to having property secured debt is, of course, to have property. Lenders usually want this property to be in the form of real estate. Condos, townhomes, rental properties… all qualify.
The most common form of property secured debt in Canada is in the form of a mortgage. It’s unlikely for a first time homebuyer to have a big fat bank account with $200K, $350K (or sadly in Toronto, $500K or more) for their first home.
The solution is to buy a home with only a small percentage of the cost (the down payment), together with the remaining balance as a loan from the bank (the mortgage). This mortgage becomes a property secured debt since you promise to make regular payments, or risk losing your house (the secured property).
Thinking of buying your first home? Learn more about getting a mortgage in my recent article: How to Get Financing as a New Home Buyer.
Secured Line of Credits
One of the fastest growing sources of debt for homeowners is the secured line of credit. The Canadian real estate market has seen some impressive increases in value. This means the home that cost $250K a few years ago may now be worth $300K or more, depending on location.
A secured line of credit gives homeowners access to that increased value, called equity in the home. This loan is also backed against the property as security for the lender.
Most lenders allow “interest only” payments on secured lines of credit. That means homeowners only have to pay back the loan interest that has accumulated for the month. They can repay the principal amount at any time, or delay it on an ongoing basis.
The form of property secured debt you’ll hopefully never face is what’s called a builders’ lien. That’s when a builder or contractor goes after a homeowner. It usually occurs after work is done on a home, and the worker puts a claim against that home in order to get paid.
When buying a new property, your lawyer will do a search to make sure the property is free of liens, so you don’t get stuck with someone else’s legal problems.
If a contractor claims you didn’t pay him for the materials or services he provided you and files a builders’ lien, contact a lawyer right away. They will guide you through the legal process.
How Can I Get a Property Secured Loan?
The first step to getting access to this type of credit is to visit a mortgage or loan professional. They can go over your specific situation and let you know what options are available to you.
If you already own a home, it’s important to tell your mortgage agent about any existing debts against your property as it impacts your ability to get a loan. A good agent will run a credit check and consult with a lawyer, but it is better for everyone to be well informed from the start.