Taking out a Second Mortgage against your home can be very helpful as long as you know what you’re getting into.
Let’s first discuss what a Second Mortgage is exactly. A Second Mortgage is registered on the title of your home just like your first mortgage that is likely carried by a chartered bank or credit union. As the name suggests, the mortgage is in second position. This means that if you default on your loan, the first mortgage holder (bank/credit union) is paid first, then the second loan holder.
Types of Second Mortgages:
The majority of products carry short terms that range between 1-3 years and require minimum interest-only payments each month.
Other lenders may offer similar term lengths but require principal and interest payments which would drive up the carrying cost each month.
A private Home Equity Line of Credit may be another option depending on the lender as well as the overall strength of the applicant. The line of credit would allow you to access the equity within your home whenever you need it, as long as you are making the interest-only payments.
Because Second position mortgages pose a greater risk to the lender, only a few offer such Home Equity Line of Credit Options.
Please read Home Equity Loans Vs. HELOC for more detailed information on the two mortgage products.
Okay, so now that we have gone over the definition of Second Mortgages, let’s discuss if they are even a good idea.
If used responsibly, a Second Mortgage can be a great short term solution for your needs.
For example, you may have a great first mortgage through a traditional mortgage lender. Something has come up, and you would like to borrow some additional funds. The first mortgage holder, however, tells you the penalty is going to be $10,000 (not uncommon) to break the term and refinance. In many instances, it just doesn’t make sense to pay this sort of penalty amount.
This is where a Second Mortgage can really save the day. As long as you have the available equity, a private mortgage lender, also known as a Home Equity lender, can offer a mortgage behind your existing mortgage. This means that you can leave your first mortgage completely untouched and hence, no penalties.
The cost to arrange secondary financing varies but you could be looking at a couple thousand or a few thousand dollars rather than $10,000 plus the bank was going to charge.
All of the set up costs for a second mortgage can be found in our article, How Much Do Home Equity Loans Costs?
Second Mortgages sometimes have a bad reputation but they really can be helpful depending on the circumstances.
The Government of Canada also has some good advice when it comes to borrowing against your home equity.
Second Mortgages Are a Bad Idea If…
-You have no means to repay both your first and Second Mortgage each month.
-No exit strategy, meaning, no real plan to pay off the more expensive loan.
-You are using the funds to purchase a depreciating asset such as a boat, personal vehicle, RV, household goods, or anything else that won’t help you to get ahead.
If you’re not sure if a Second Mortgage is right for you, click and read our article on When To Consider A Home Equity Loan.
Where Can You Get A Second Mortgage?
Second position mortgages are sometimes offered by your existing lender but they are not keen on the idea.
Most of the time, Second Mortgages are sourced from our private lending or Home Equity lending partners. They specialize in secondary financing and offer relaxed qualification rules.
The loan amounts are heavily weighted on your available equity, not your income or credit.
We always start by working with you and your existing lender. If the first mortgage options are available, we will pursue such solutions. If not, we will explore secondary options to get the help you need.
Are These Lenders Safe?
Yes, we only work with registered equity lending institutions. These are professional Canadian only corporations. They fill a large gap for those who need help to access their home equity. Banks, of course, would like to help their customers more but they are heavily regulated and sometimes not able to qualify clients for additional loans.
Do not be afraid of secondary or alternative mortgage financing options. It is important to speak with an experienced home equity mortgage advisor such as GOAT Mortgages and get as many facts as possible before making a decision.
Please do not call a lender directly because you heard them on the radio or saw a commercial. Their job is to place you in a home equity loan no matter what. Our job is to provide you with unbiased advice and help you to obtain the best solution which may not always mean a Second Mortgage or Home Equity Loan.
Should you have any questions, please contact us today and we will be happy to help.