A second mortgage is another loan taken with a different mortgage lender on a property that has an existing mortgage. The person who applied for the mortgage must still pay the primary mortgage with the addition of also having to pay for the second mortgage.
Reasons Behind Higher Interest Rates On A Second Mortgage
When a property is mortgaged for the second time, the lender who gives the loan takes on more risk because he/she is only in the second position to have a claim on the property. An illustration of this is when a homeowner fails to pay, the property will be taken into possession and the first mortgage’s lender will be paid out first. This means that the second mortgage’s lender may not get paid in full or not paid at all. This is why the interest rates for second mortgages are almost always higher then what is charged for a principal mortgage.
Why Do Canadians Get A Second Mortgage?
The usual reasons for getting a second mortgage are as follows:
- To fund a home renovation
- To have cash for unexpected expenses such as medical emergencies
- To pay for high interest debts therefore consolidating those debts
- To fund expensive tuition fees for post graduate studies or college
- To have cash for a dream wedding or vacation
What Are the Advantages and Disadvantages of a Second Mortgage?
As with all types of loans, second mortgages have a set of advantages and disadvantages. Below is a summary of each to help you make a better informed decision.
Second mortgage advantages are:
- It is easier to apply for because there are many providers for it like private mortgage lenders, credits unions, and banks.
- You can tap up to 80% of your home’s appraised value provided the existing balance you have for your first mortgage has already been subtracted.
- It is available in 1-year terms and most require interest-only payments.
- There is no need to discharge your current mortgage so you won’t be charged penalties and fees for such.
- Anyone who owns a home with a primary mortgage and a decent credit history can apply and be approved for a second mortgage.
Second mortgage disadvantages are:
- You have an increased risk of foreclosure in the event that you default on your loan. The second mortgage lender can foreclose your home by purchasing the first mortgage.
- Because it poses more risks for the lender, a second mortgage has a higher interest rate.
- Repayment might be required in as little as a year but you’ll be bound by terms which can last as long as 30 years.
How Can Someone Qualify for A Second Mortgage?
Each lender has their set of terms before they approve your second mortgage application. They will look for the following:
- Equity that is high enough to be worth the investment risk.
- Income that is substantial enough for you to be able to make payments.
- Credit Score that is good enough to qualify for a lower interest rate. They might consider those with a less than appealing credit score but they will surely charge hefty interest rates.
- Property desirability is important. Lenders need to be sure that should you default on your payments, your property has good enough value on the market so they can cover their possible loses.
A second mortgage will greatly help you financially if you are cash poor but possesses substantial equity in your property. Allow our mortgage professionals to help you apply for a second mortgage by contacting us soon!