A blanket mortgage refers to a mortgage that is secured with more than one property used as collateral. The major advantage of these types of mortgages is that they can help the investor secure maximum leverage when acquiring a property 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 property that is included in the mortgage.
By using this type of mortgage, actually investors can achieve 100% financing of the acquisition of a property, 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 the article Using Borrowed Funds to Finance Property Investments. This article describes under what conditions the use of a mortgage loan will increase the return of the investor.
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To understand how blanket mortgages can help obtain 100% financing consider an investor that wants to acquire a property valued by the bank for $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. The second property to be included in the mortgage is valued by the bank at $300,000. With the two properties as collateral and a 70% LTV the investor can actually obtain a loan of $350,000 (given that the banks also evaluates that the investor will have the ability to make 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 loan payments for several months.
Note that if the investor wanted to borrow only $200,000 that would cover 100% the purchase price of the property to be acquired then the LTV of the mortgage encompassing the two properties will be LTV=200,000/500,000= 40%.
Besides allowing an investor to finance the acquisition of a property 100% with borrowed money, blanket mortgages offer some additional advantages. In particular, they allow the property investor to obtain better terms because of the lower LTV that can be achieved. 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.
Blanket mortgages allow also the consolidation of other properties to a re-financing package of another property. This again can help obtain a lower LTV and better re-financing terms.
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