Posted in Finance, Accounting and Economics Terms, Total Reads: 241
Definition: Blanket Mortgage
Blanket mortgage is also known as a blanket loan. It is a type of loan which covers more than one piece of real estate property which is mostly a plot of land. This property is considered as collateral on the mortgage, but the individual parcels or parts or plots of land may be sold one at a time.
Using a blanket mortgage is a great alternative option for a developer, who would otherwise have to take out number of small individual properties which fall within a large property, which they were planning to sell in parts. The basic purpose of blanket mortgages is to account for the cost of buying and developing the land property which is to be divided into individual lots for reselling or any other purpose. After a smaller plot of a larger property is sold, a specific portion of the mortgage is released and the rest of the mortgage remains as it is. This leads to a significant reduction in costs and improved efficiency in time utilisation.
For example, let us take the case of a builder who wants to build houses in a particular locality and then sell them. The best way for him to do this is to use a blanket mortgage to pay for the construction of all the houses, thus saving on time and various miscellaneous costs like travel, documentation, finance costs etc. Supposing that one day a home is sold, then the portion of the mortgage that was used to fund that home is returned to the creditor, which is subsequently retired. Then, there would be an adjustment required in the remaining balance outstanding in the mortgage. Thus, the mortgage is paid out in a continuous manner in phases as the houses are sold and eventually when all houses are sold, the entire loan/mortgage is repaid and retired.