Second mortgages in Canada can be intimidating if you don’t have an expert to help walk you through the process. But depending on your financial situation, a second mortgage may be a solid option.
Essentially, a second mortgage is a loan that is secured against your home, just like a first mortgage. A second mortgage is not your second term or another mortgage you have on a separate property you own.
The name comes from the fact that all mortgages have a priority, and a second mortgage is in the second position to be paid back in the event of a default. Technically speaking, you could have a third and a fourth mortgage if a lender was willing to take the risk!
This leads us to the question…
Why would you want to get a second mortgage?
There are a number of reasons why you may want to consider getting a second mortgage in Canada. Here are a few:
- Home renovations
- Paying for education like college or university
- Consolidating debts like credit cards or personal loans
- Investing in a second property
Another reason related to the ones above is that you may need to access the equity in your home but you’re in the middle of the term of your first mortgage, and it doesn’t make sense to pay the penalties and fees of refinancing your first mortgage.
In that case a second mortgage may be more appropriate.
Debt consolidation is a major reason to leverage your home’s equity. You may be able to pay off your unsecured credit cards with a second mortgage and depending on the situation, go from paying 24% interest on a credit card to the high single digits of the second mortgage.
Read More: 6 Mortgage Refinance Tips To Save You Money
Generally speaking, second mortgages have a poor reputation in Canada and the United States. But they do have their place in the market.
In fact, plenty of products on the market are second mortgages, they just aren’t known by that name. A Home Equity Line of Credit (HELOC) is a second mortgage for example, even though most people don’t think of it that way since it’s a revolving credit line. A HELOC is still in second position though.
No matter what form your second mortgage takes, whether it’s a lump sum or a revolving line of credit like a HELOC, you need to understand the risks involved and the exit strategy.
What are the risks of getting a second mortgage?
Like all forms of credit, having a plan for how you are going to use the money and how you are going to pay it back is crucial.
Second mortgages are seen as more risky in the eyes of lenders because of them being in the second position. This means they are less likely to recoup all of their money in the case of a default and that’s reflected in the higher interest rate.
Second mortgages in Canada almost always have a higher interest rate than a first mortgage and that means increased monthly costs for you as the borrower. Before you take on additional debt, especially debt that’s secured against your home, make sure you can afford to carry it.
A lot of private lenders only consider the equity in the home when deciding who to lend to. Instead of qualifying borrowers the same way that banks do, by assessing their ability to handle the loan and repay it back over time, private lenders are protecting themselves by banking on your equity.
This puts the onus on you and your broker to make sure you can afford the second mortgage before you sign on the dotted line.
There are also the standard fees associated with originating the loan to consider, as well as the conditions of the second mortgage. This is another reason why you should read the fine print and work with a professional that has your best interests in mind.
Read More: Why Choose A Mortgage Broker?
Should you get a second mortgage?
Answering that question without knowing your entire financial situation is tough, but here’s one piece of advice. Know your end game.
As a short term solution where you intend to pay it off, a second mortgage may be a good option. Like in the debt consolidation scenario above for example.
If you have a large sum of credit card debt and move it to a lower interest rate vehicle like a second mortgage, you will save a lot of money. This is what we do for many of our clients, especially in the case where it doesn’t make sense to break the first mortgage because of the penalties involved.
Our game plan for those borrowers is to usually refinance both the first and second mortgages together when the first comes up for renewal a year or two later. In that situation, a lot of our clients have gone from paying 24% interest on their credit cards to 12% on their second mortgage, and then to 4-6% after they refinance.
A much better financial situation overall.
So if a second mortgage is a stepping stone on the path to better finances, it may be the right choice for you. If you just want the money to go on vacation… probably not.
One thing you have to keep in mind when it comes to second mortgages in Canada is if you stop making payments on the second mortgage, your lender can start the foreclosure process to take your home, even if you are up to date on your first mortgage.
Don’t make this mistake.
Before you commit to a second mortgage, make sure it makes sense financially and that you have a exit strategy in order to protect your assets.
Ready to talk to mortgage professional about your financial situation? Ardent Mortgages can help! Click here to schedule your free, no obligation consultation call or call directly at 1-844-877-8225.