How to Retire Debt-Free and Wealthy by Christine Ibbotson

Author:Christine Ibbotson
Language: eng
Format: epub
Publisher: Nimbus Publishing
Published: 2020-05-05T19:59:17+00:00

More about a Collateral Charge

A collateral charge will become more popular as more people discover the flexibility and ease of this lending instrument, and we decided to use this product for Cheryl and James. All the big banks offer a variation on the 100% collateral charge, so it is a good idea to understand fully each of their offerings. It is a great tool for investors or clients wanting to purchase rental properties, and can be used effectively for tax efficiency. The product is called a “charge” because it is secured on a property for 100% of its appraised value at the time of setup. The client signs for the full value of the property, but will have access only to 80%, thereby meeting the guidelines of a conventional lending platform. The collateral charge has no term or renewal, and the client can set it up and use it for as long as he or she owns the property, therefore ensuring no additional title fees or legal costs. Herein lies one of its true benefits.

Because the client signs for the full value of the property, there is available room for future equity takeouts as the value increases over time, and this built-in equity can be used as future lending availability. Another added benefit is that the charge is approved and set up only one time, and the client no longer has to renew or change banks at the end of a typical mortgage term. Within the charge, the client can easily manipulate the product to take advantage of special rate promotions or leverage lending. Most big banks offer this product with the flexibility of up to ten different lending segments, so that each segment can run independently from the others. All segments can have different rates and terms that can be easily changed at the client’s discretion. A collateral charge is perfect for someone who wants to purchase rental properties, and is used by our affluent clients exclusively.

When you purchase an investment property, the collateral charge will be set up for 100% of the purchase price. The federal government now mandates that rentals cannot be mortgaged for more than 80%, and this is fine for this product. If you wish to write off the full 100% of the purchase, it is always recommended to have a collateral charge on your primary residence to establish a separate segment for the 20% down payment portion. Most banks will label each segment for you to ensure that, come tax time, one can clearly differentiate between a personal mortgage segment and a rental segment. Here is an example.

Let’s say that you wish to purchase a rental property for $300,000 and want to use the down payment for the purchase ($60,000) from the equity in your home. Let’s also assume that your primary residence is valued at $500,000 and you have a personal mortgage of $200,000. Here is how the two charges would be set up.

Value of your

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