What is a Second Mortgage?
A second mortgage is essentially what it sounds like, a second loan taken out against a property that already has a mortgage on it. The mortgage is in second position, which means that the lender is taking on more risk than the lender providing the first mortgage.
When a borrower defaults on their payments, and this can be on either the first or second mortgage, the lender gets paid back based on their loan position. This means there is a chance the second lender may not be paid out in full, depending on the situation of the borrower and the market at the time of the default.
To compensate for the increased risk of the loan, second mortgages typically have higher interest rates than first mortgages.
If you have an existing mortgage, a good credit score in the 650+ range and more than 20% equity in your home, the best option in terms of second mortgage would be a home equity line of credit, also known as a HELOC. A HELOC functions similar to a credit card, except it has a considerably lower interest rate than most credit cards and is secured against your property.
Why would I need a second mortgage?
The most common use of a second mortgage is to consolidate unsecured or high interest debt. After that, they are one way you can finance home improvements or repairs if you don’t have the cash available.
In terms of debt consolidation, you can save you potentially hundreds of dollars of a month in debt payments since it typically involves taking unsecured debt with an interest rate around 20% and moving it to a loan with an interest rate of 10% to 12%.
Securing your debt against your home can also have the effect of improving your credit score, which is often the situation with clients that we work with. In their case, it’s the first step in a plan to reduce the borrower’s interest rates on their debt, increase their cash flow each month, and increase their credit score with the goal of refinancing again a year or two down the road with a bank or other lender.
Moving them up the financial ladder in a way.
In order to qualify for a second mortgage, lenders want to see four things, some of which are more or less important than others. Each lender has their own criteria that they care about when assessing borrowers. This is one of the reasons it can really pay to work with a mortgage broker that understands and works with a variety of lenders.
The four areas are:
- Equity. The more equity you have in your home, the better your odds of qualifying for the second mortgage are. For many private lenders, equity is the factor that will decide your application.
- Income. Just like a first mortgage, lenders want to verify you will be able to handle the debt load and can afford to make payments on the loan. A higher income increases your ability to pay.
- Credit score. The higher your credit score, the lower your interest rates. When working with alternative lenders like Trust companies your credit score may be a major factor but for private lenders it’s less important to the overall picture.
- Property. Some lenders only lend on properties that fall under certain strict criteria or geographic areas. Each lender has their own criteria they look at when considering properties so working with a knowledgeable mortgage broker is crucial.
Looking for a second mortgage?
Speak to one of our expert mortgage agents about the most affordable option given your credit score, income and property.
Second Mortgage Rates
|Lender||Example company||Product||Interest rate||Credit score||Minimum equity|
|Major bank||ScotiaBank||Home equity line of credit (HELOC)||3.95%+||650-900||20%|
|Trust company||Community Trust||Second Mortgage||15.00%||550-700||10-15%|
|Private mortgage lender||Squire MIC||Second Mortgage||12.00%||Less than 600||10% or less|
Which lenders offer second mortgages?
Not all lenders offer second mortgages. It depends on the lender’s risk tolerance and the markets they want to operate in. Some lenders specialize in second mortgages. Working with a mortgage broker that has access to a number of different lenders and can match your exact financial situation to the right lender for you is your best bet on getting the financing you’re looking for.