Difference between Collateral and Mortgage

Mortgage and collateral are terms which are widely used in the business world, and hold great implications for both the borrower and the lender.

Mortgage is simply the loan taken out by the borrower and is secured by a real property. The agreement provides necessary finances for home buyers. However, that loan amount must be backed by a real property, the value of which must be equal to or greater than the overall payments expected to be made to the lender.

Collateral is basically the term used when the borrower gives assurance to the creditor against the loan amount. He or she will make a commitment to pay back the loan by offering something in return. That something could be an asset (land, building, equipment), valuables (jewellery) or security (bonds, derivatives), and will serve as collateral, further assuring the lending party of periodic payments in case of default.

In mortgage related loans, collateral will be a real estate property, which is usually referred to as collateral mortgage. It will serve as a line of credit and can be used in the future.

Mortgage comes in various types, depending on the interest rate, principle amount and the overall duration. The basic consideration is whether to pursue a fixed rate mortgage or variable rate mortgage. In the former, the borrower will make fixed interest payments over the course of the loan duration, whereas in the latter the interest rate applied will be subject to adjustments from time to time, depending on the prevailing market conditions.

For this reason, mortgage will mostly be applied to immovable objects. However, when determining collateral, one can either secure the loan through tangible assets or intangible ones. Both type of assets will have their own market implications, but will serve as security in case of default. The lender will have the legal right to sell these assets and claim the remaining loan amount.

Instructions

  • 1

    Collateral

    It is a form of security at the lender’s disposal when giving out a loan to someone. The collateral can take the form of asset based lending – land, building, real estate, etc - or market-based lending (stocks, bonds, notes or derivatives).

    Image courtesy: strategicloandefault.com

  • 2

    Mortgage

    Mortgage loan or simply a mortgage, denotes a loan taken out by borrowers to buy a home. It is secured by a real estate property, further certifying a loan agreement between two parties with the pledge ending or dying when the obligation is met or the property goes through foreclosure.

    Image courtesy: expertmortgages.ca

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