How a Second Mortgage Works
As a homeowner who wishes to unlock the equity
that you’ve already built up in your current property, you might have been toying with the idea of getting a second mortgage.
However, you might be wondering if it is indeed the best choice for you. In this post, your trusted mortgage broker in Canada tells you what a second mortgage really is, as well as its pros and cons:
What Is a Second Mortgage?
A second mortgage is a second lien against your property or a home equity loan. In Canada, the interest rate for a second mortgage is usually higher than the interest rate for first mortgages. This is because the lender is taking more of a risk in the event of a default, which means the lender deserves to be paid more for taking the risk.
How Does It Work?
When you get a second mortgage, the lender will give you a lump sum on the spot. You can then use that money to do whatever you want with it. The lender will record its lien against your property and your deed, just like your first mortgage. It will also hold an interest in your property, as well as any income you get from it.
It is important to note that in the event that your property is foreclosed, your second mortgage will just be written off. This means that if you default on a first mortgage, the second mortgage lender will get nothing.
You can usually get a 2nd mortgage assuming you own 15% equity at all times. For example, if you own 20% equity now, you can take out up to 5% more equity so you hit your 15% equity owned floor. Below is an example of a typical lender quote based on the size of your owned equity.
35% Equity Owned: 8.99% 20% Equity Owned: 10.49% 15% Equity Owned: 11.49%
There is usually a one-time lender fee equal to 2% of the 2nd Mortgage total. Brokers will charge up to 2% as well.
Second Mortgage or Refinancing - Which Is Better?
For most homeowners, refinancing their mortgage is the better option. With a refinance, you get a new mortgage with a new contract. This may lead to better interest rates, as well as new lenders willing to give you a mortgage at a better rate, given your financial situation and market conditions.
But, if you are very comfortable with your first mortgage, don’t have a lot of cash flow, and don’t want to break your current mortgage by getting a new one, then a second mortgage might be the better option.
Pros of a Second Mortgage
Interest rates are usually lower than those of a first mortgage.
There is a much more relaxing qualification process, meaning that you can get the money right away. Rates depend on how much equity you own and if you own a lot, they generally start just under 10%.
Unlike a first mortgage, there’s a shorter vetting process and you get the money much sooner.
Cons of a Second Mortgage
You might get higher interest rates than you can get on other types of loans (like HELOCs).
You will be responsible for the ongoing interest payments, meaning you will have to budget for that.
If the market value of your property goes down, the lender can use your property to secure their second mortgage, meaning your property may be foreclosed on.
THE BOTTOM LINE
A second mortgage might be the key to getting the cash you need to buy a new car, renovate your kitchen, take your family on a dream vacation, or others. However, it is equally important to carefully weigh the pros and cons before agreeing to go through with it.
If you are interested in getting a second mortgage, contact Level Up Mortgages, your trusted mortgage broker in Canada today. We can help you get the right mortgage for you. You can reach Paul Davidescu at 604-809-3188. See what you qualify for and contact Paul to get your pre-approval.
See what you qualify for or contact Paul to get your pre-approval.
Paul Davidescu (www.levelupmortgages.com)
Level Up Mortgages
604-809-3188
paul(at)levelupmortgages.com
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