Second Mortgages

Second mortgages have many of the same features as both regular conventional and non-conventional mortgages.  Second mortgages simply refer to a mortgage that is second in line or place to another mortgage or loan on the same property. The mortgage which was obtained first and registered is called a first mortgage. 

Real estate can have multiple mortgages on specific properties.  In some cases there are third mortgages or even fourth mortgages on properties. 

Second mortgages are typically taken as secured home equity loans from financial institutions.  Second mortgages are considered riskier loans for financial institutions and lenders and usually have a higher interest rate than first mortgages.  However, in some cases, when a borrower has a long term fixed rate mortgage, the actual rate on the second mortgage or secured line of credit, commonly referred to as a Home Equity Line of Credit (HELOC) actually has a lower rate than the first closed mortgage. 

If mortgage obligations are not fulfilled by the borrowers and foreclosure or power of sale occurs, the first mortgage gets paid off before the second mortgage.   

Advantages and uses for second mortgages

  • Opportunity to establish an emergency fund, with no required interest payments unless the loan is actually utilized
  • Helps borrowers refinance to consolidate other high interest loans including credit cards
  • Provides borrowers with the ability to have funds available for investments, including other real estate, stocks and bonds
  • Can be obtained with no difficulty if equity exists in most cases
  • Second mortgage payments in many cases can be minimal with interest only options

It is extremely important to note that second mortgages can be financial pitfalls for borrowers.  The ease of borrowing money and using funds as a result of built up equity in one’s home makes things tempting for some individuals to use funds for recreational purposes.  Additionally, when banks or lenders will not qualify borrowers for second mortgages, the private second mortgage market in Canada can be very expensive.  Private mortgage lenders typically charge broker fees, lender fees and offer second mortgages at highly inflated rates.  Many lenders will also only offer second mortgages for short terms, typically of one or two years in duration.  In these cases, if the borrower would like to renew the second mortgage at maturity, the lender will quite often want additional broker fees and lender fees.    

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April 27, 2017

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