What Is Collateral?

what is collateral?

Collateral is a term used to describe an asset that a lender accepts as security for a loan. Depending on the purpose of the loan, collateral can be real estate or other types of assets. For the lender, the collateral serves as a type of insurance. If the borrower defaults on their loan payments, the lender can seize and sell the collateral to recoup some or all of their losses.

how collateral works

A lender wants to ensure that you’ll be able to repay the loan before giving it to you. As a result, many of them require some level of protection. Collateral is a type of security that reduces the risk for lenders and ensures that the borrower fulfills their financial obligations. If the borrower defaults, then the lender has the option to seize the collateral and sell it, with the proceeds going toward the unpaid amount of the loan. To reclaim any leftover balance, the lender can take legal action against the borrower. 

As previously stated, collateral can take many forms. It usually refers to the type of loan; for example, a mortgage is secured by the residence, but a car loan is secured by the vehicle in issue. Other assets can be used to secure non-specific personal loans. For example, a secured credit card can require a cash deposit equal to the credit limit, such as $500 for a $500 credit limit.

Collateral-backed loans often have lower interest rates than unsecured loans. A lien is a legal right or claim on an asset to satisfy a debt that a lender has on the collateral of a borrower. The borrower has a powerful incentive to repay the loan on time because, if they don’t, they risk losing their home or other collateralized assets.

types of collateral

The type of loan frequently determines the nature of the collateral. Your home becomes the collateral when you take out a mortgage. If you take out a car loan, the car becomes the loan’s collateral. Cars, bank savings deposits, and investment accounts are all frequent forms of collateral that lenders accept. In most cases, retirement accounts are not accepted as collateral.

Future paychecks can also be used as security for very short-term loans, not just payday loans. Traditional banks provide such loans, which are typically for a few weeks. Even if you have a true emergency, you should read the fine print and compare rates before taking out one of these short-term loans.

COLLATERALIZED PERSONAL LOANS

A collateralized personal loan is a type of borrowing in which the borrower pledges an object of value as security for the loan. The collateral must be worth at least as much as the loan amount. If you’re looking for a secured personal loan, your best bet is to go with a financial institution with which you already do business, especially if your collateral is your savings account. If you already have a relationship with the bank, it will be more likely to approve the loan and provide you with a reasonable interest rate.

Examples of collateral loans

RESIDENTIAL MORTGAGES
A mortgage is a loan that uses your home as collateral. If a homeowner fails to pay their mortgage for more than 120 days, the loan company can initiate legal action, which could result in the lender taking possession of the home through foreclosure. The property might be sold to satisfy the remaining principal on the loan once it has been transferred to the lender.
HOME EQUITY LOANS
A home can also be used to secure a second mortgage or a home equity line of credit (HELOC). The loan amount will not exceed the available equity in this scenario. For example, if a home is worth $200,000 and the primary mortgage balance is $125,000, a second mortgage or HELOC will only be available for up to $75,000.
MARGIN TRADING
Margin trading also considers securitized loans. An investor uses the balance in his or her brokerage account as collateral to borrow money from a broker to gain shares. The loan increases the number of shares an investor can purchase, hence boosting the potential gains if the value of the shares rises. However, the risks are amplified as well. If the value of the shares drops, the broker will demand payment of the difference. If the borrower fails to cover the loss, the account acts as collateral.

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Confederation GO Station

Ford announces construction on new Hamilton GO Station

This week witnessed an excellent level of transactions, with Brantford, in particular, picking up some slack.

Hamilton narrowly avoided a month without a multi-residential sale. On the books for September is the sale of an eight-unit building near Stoney Creek. It traded for close to $300,000 per unit, a high value.

Also in HamiltonSpallacci Homes purchased 5.92 acres of land near Lime Ridge Mall for $3 million. It’s a peculiar purchase as the site appears to be a cemetery.

The largest purchase this week took place in Kitchener. The 401 Group of Companies purchased an 81,000 sq. ft industrial building for $28 million ($344/sq.ft). That’s a high purchase price for an industrial facility, but it also includes approximately 3.5 acres of excess land.

In the news, Doug Ford has announced construction on a new GO Station in Hamilton, twin towers have been proposed in Stoney Creek, and Ontario plans to cut development fees on affordable housing.

The GHA Sales Transaction Database offers you this week’s CRE transaction activity.

News Headlines

Dundas seniors housing demo for 11-storey condo proposed
The Hamilton Spectator, October 3, 2022

Empire’s planning application for Hagersville quarry property explained
The Hamilton Spectator, September 27, 2022

Ontario government investing $90M in skilled trades programs
CBC News, September 26, 2022

Long approval times, high municipal fees adding ‘unnecessary costs’ to new GTA housing: Study 
CBC News, September 27, 2022

Kitchener 8 storey, 166 unit development approved
The Record, September 27, 2022

Amazon fulfilment facility under construction in Cambridge
The Record, September 28, 2022

Toronto’s largest film studio announce major expansion
BlogTO, September 27, 2022

Hamilton rated one of Canada’s best locations to invest

Forge & Foster is moving! Sept. 23 will be our last day at 67 Frid St. By Sept. 27, we’ll be set up at 29 Harriet St., in the exciting, high-growth film district of Barton-Tiffany.
This week witnessed a large volume of transitions, typical for the transition period between months. It’s great to see these patterns holding even as interest rates continue to rise.
This week’s largest transaction occurred south of Kitchener in North Dumfries, where an industrial building on a large swath of land sold for $19 million.

The second largest transaction took place in Waterloo, where Village Developments purchased almost an acre of residential land for $14 million.

The largest transaction in Hamilton was in Stoney Creek, where 12.45 acres of industrial land sold for $13 million (approximately $1 million/acre).

In the news, Hamilton has been rated as one of Canada’s best locations to invest, New Horizon Development Group submitted a bid for taller buildings, and Toronto‘s average condo rents have surged to a record high.


We’re moving! 
Sept. 23 will be Forge & Foster’s last day at 67 Frid St.
As of Sept. 27, our new address will be: 29 Harriet St. Hamilton, ON L8R 2E5

The GHA Sales Transaction Database offers you this week’s CRE transaction activity.
News Headlines

Hamilton rated as one of Canada’s best locations to invest 
Invest In Hamilton, September 2022

Dundas site receives conditional approvals for 4 storey, 51 unit development
The Hamilton Spectator, September 12, 2022

New Horizon Development’s new bid aims taller
The Hamilton Spectator, September 12, 2022

Home construction authority moves to revoke Burlington developer’s license
The Hamilton Spectator, September 10, 2022

6 storey building set to replace three houses in Waterloo
The Record, September 9, 2022

Kitchener’s Mill St plan would transform area around LRT station with six towers up to 1,500 units
The Record, August 29, 2022

August 2022 Rent Report
Rentals.ca, September 2022

Toronto condo rents surge to record average $2,806/month
The Toronto Star, September 7, 2022

Ontario passes strong mayor legislations, providing Toronto and Ottawa veto power
CBC News Toronto, September 8, 2022

Bank of Canada expected to hike interest rate to 3.25%
The Hamilton Spectator, September 7, 2022

Tal: Interest rates could deepen Canada’s rental housing crisis
RENX, September 8, 2022

Rendering of the Design District towers by Emblem Developments

Alex Manojlovich’s Weekly Market Report: Emblem Launches Largest Downtown Hamilton Condo Project

This week witnessed some great action.

The retail asset class continues its return to consistency with a few smaller deals this week.

The largest transaction in Hamilton this week was for 250 Fruitland Rd. in Stoney Creek. This 19.64-acre piece of land sold for $23.562 million (approximately $1.2 million/acre). This is below market value for residential land. However, the parcel appears to be zoned agricultural currently.

Nearby, developer Melrose Investments purchased 4.44 acres for $900,000 ($202,000/acre), which is great value but probably includes more work than the Fruitland Rd. deal.

The largest transaction in the area occurred in Cambridge, where Argyle Capital Partners purchased a 200,000 sq. ft industrial building for $33 million ($165/sq. ft). It’s a slightly large purchase price given the market and size of the asset, but I wouldn’t be surprised if this were fair market value given the way industrial demand and industrial market lease rates continue to grow.

In the news, Emblem launches Hamilton’s largest downtown project, the COA moves forward with a 109-unit development project on Dundurn St., and the website has been launched for the 75 James Condo development by LiUNA.

The GHA Sales Transaction Database offers you this week’s CRE transaction activity.


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News Headlines

Emblem launches largest downtown Hamilton condo project
RENX, June 27, 2022

75 James Condominiums official website
2022

Minor Variance re: 330 Dundurn St. S. eight-storey residential project
City of Hamilton Committee of Adjustment

New pocket track expands West Harbour GO train service
In The Hammer, June 28, 2022

Centre[3] expands into Forge & Foster’s 29 Harriet St. in the Bayfront Studio District
The Hamilton Spectator, July 4, 2022

Feds turnover Burlington Canal piers to HOPA for pedestrian use
Global News, June 28, 2022

June 2022 Rent Report
Rentals.ca

Blackstone sees opportunities in student housing, multi-family, life sciences and more
The Hamilton Spectator, June 29, 2022

London, ON to cut parking requirements
CBC News, June 24, 2022

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Podcast: Is industrial real estate investment risky?

Podcast: Is industrial real estate investment risky?

Podcast: The Industrial Real Estate Show with Chad Griffiths

U.S.-based investor, broker and trainer Gary Wilson joins host Chad Griffiths to take a critical look at industrial real estate investing. Among their topics will be:

– why industrial real estate is risky;

– four main attributes of an industrial building; and

– characteristics of a successful industrial park. READ MORE >>

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