Strategic capital mortgage


Last century has seen a wide range of financial products flooding the market. Terms and conditions of loans are modified to cater to a larger set of borrowers. A wide range of mortgages, some on fixed assets, some on inventory, some on liquid assets like bonds, etc., is now available to meet different types of financial requirements. Basically, all these mortgages are alike, that is they allow the borrower an access to funds at an agreed rate of interest on security of these fixed assets, inventory etc. Because of affordability and flexibility of these financial products, there is a surge in demand for mortgages.

 

What is strategic capital mortgage It is tough to define. At micro level take an example of an individual who invests in tax saving bonds. The obvious objective of the investment is to save taxes, and the non-obvious objective is to earn interest on the funds blocked in the bonds. If he goes a step further, by taking a mortgage loan on these tax bonds to meet his personal requirement, he would be making a strategic use of his capital. Similar strategic capital mortgage could be used to raise funds against rents receivable, other annuities, or structured payments. Businesses too resort to similar moves.

 

Generally, strategic capital mortgage forms part of contingency plans or risk management in business or personal finance. These contingency plans are short-term solutions till the main plan resumes. In the above example, the mortgage loan could have been used perhaps to meet unforeseen medical or home repair expenses. In businesses, this type of finance works like a stand-by machine. As strategic capital mortgage loan is obtained by re-utilizing an existing mortgage or asset that is already under some use or mortgage, the credit score of the person or business is not a major issue.

 

What are the advantages and disadvantages of such strategic capital mortgages Major advantages are

 

  • they allow the borrower or business to access funds that he or it does not have as of now, or will have only at a later date
  • they ensure that any sudden unforeseen expenditure is met or any contingent expense is dealt with for time being
  • as it is not essential that borrower utilize them, they do not entail continuous interest liability, unlike other type of loans
  • the borrower need not set apart some additional funds for the contingency. The impact of this can be understood more clearly in terms of businesses, which borrow at a higher rate of interest for day-to-day functioning. If they choose to isolate some funds for the contingency, they would need to borrow more funds for regular purposes. These funds obviously come at a price. So they will be paying interest on funds that are essentially set aside as provision for contingency, whether or not the contingency occurs. In effect, they would be paying interest on funds that are not being utilized by the business.
  • even the borrower whose credit is not good may be able to get such loans

    • Major disadvantages of strategic capital mortgages are:

     

  • they are short-term funds.
  • they carry higher interest rate.
  • the quantum of loan may not be very large

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