Property Investment Basics: Blanket Mortgages

blanket mortgages

Blanket mortgages can be a very useful financing tool for real estate investors pursuing high returns. Using borrowed funds can under certain conditions help increase the return on the investor’s equity, that is, money from his/her own funds that he/she has invested in a property.

Blanket Mortgages

Blanket mortgages are mortgages that are secured with more than one property as collateral.  Blanket mortgages can help the investor secure maximum leverage when acquiring a property investment since the loan-to-value (LTV) ratio of the loan provided is not based only on the property acquired, but also on the value of the additional real estate that is included in the blanket mortgage.

Actually the investor can achieve 100% financing of the acquisition of a property by using the blanket mortgage, which can skyrocket the return on the investment under the right circumstances.  In order to understand better how property investors can use borrowing to enhance investment returns read our post Borrowing Can Help Property Investors Achieve High Returns.  This article describes under what conditions the use of a mortgage loan for the acquisition of a property will increase the return of the investor.

Getting 100% financing with blanket mortgages

To understand how a blanket mortgage can help 100% financing consider an investor that wants to acquire a property valued by the bank at $200,000.  Consider also that the best LTV ratio the investor can get from the marketplace is 70%.  The investor, who is very confident about the appreciation potential of the property, decides to pursue 100% financing of this acquisition with borrowed funds by using a blanket mortgage.   Thus, the investor requests from the bank a loan to be secured by the property considered for acquisition and another property owned by him/her, which is free of any loans.  Let’s assume that the second property to be included in the mortgage is valued by the bank at $300,000.  Thus, the investor can use real estate of a total value of $500,000 as collateral for obtaining 100% financing of the $200,000 needed to acquire the property under consideration.  Furthermore, this loan will have a loan-to-value ratio of 40% ($200,000/$500,000), which is considerably lower than the maximum of 70% allowed by the bank.

Alternatively, with the two properties as collateral and a 70% LTV, the investor could actually obtain a loan of $350,000 (given that the bank can also confirm that the investor will have the ability to service the monthly mortgage payments).  In this way the investor can not only finance 100% of the purchase price of the property acquired, but also cover the required mortgage payments for many months.

Other advantages of blanket mortgages

Besides allowing the acquisition of a property with 100% financing, blanket mortgages offer some additional advantages to real estate investors. In particular, blanket mortgages allow property investors to obtain better loan terms because of lower LTV.  As indicated in our previous example, using this type of mortgage the investor would be able to obtain 100% financing with only 40% LTV.  A lower LTV makes the loan more secure, thus allowing the lender to offer better terms, such as a lower interest rate and potentially longer term.  These better financing terms will further enhance the positive effect of leverage on the investor’s return.

Blanket mortgages allow also the consolidation of other properties to facilitate the re-financing of another property.  This again can help obtain a lower LTV and better re-financing terms.

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Author: SPI Team

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