What is a second mortgage?
A second mortgage corresponds to a second mortgage granted on a property that is already mortgaged. It is therefore an additional loan made by the borrower with the same lender or a different lender.
In the event that the two lenders are different, the one who holds the first mortgage always has priority over the repayment of the loan. As a result, the one who grants the second mortgage is therefore in second place.
The possible amount to borrow will be determined according to the accumulated net value of the property concerned, which is called the mortgage quota. It is therefore the value covering the two debts that will have to be repaid.
In terms of repayment, second mortgages are mostly for one or two years, during which the lender pays the interest. At the end of the period, you have two choices:
- repay your entire loan
- make another mortgage.
Second mortgage: for whom?
First, be aware that lenders granting a second mortgage will be more interested in the equity in your property than in your credit rating or your cash flow.
Thus the second mortgage will correspond more to people with a property with a high net worth, than people with income or a large amount of credit rating.
As a result, the second mortgage is aimed at anyone wishing to obtain significant new financing. However, before applying for a second mortgage, you must check that you are eligible for the process.
Why take out a second mortgage?
Second mortgages make it possible to obtain a relatively large loan. As a result, they are often used to finance a project representing a large sum. For example, buying a house or refinancing a house.
Indeed, although financing for the purchase of a home can be done with a first mortgage, the first lender can only grant up to 60% of the loan-to-value ratio. Which, sometimes, does not represent enough capital.
In addition, second mortgages are often used by Canadians to consolidate high-interest debt, or for large unexpected expenses such as medical bills.
To make the best choice according to your financing plans, you can get advice on your mortgage refinancing in seconds and for free:
What are the conditions for obtaining a second mortgage?
As mentioned before, to be eligible for a second mortgage, you must meet certain eligibility requirements. These eligibility criteria for obtaining a second mortgage are explained by the fact that the lender takes a greater risk by granting a second mortgage.
The eligibility requirements for obtaining a second mortgage are as follows:
- the amount of the net value of the property: the greater it is, the more the applicant has a chance of obtaining his second mortgage.
- the amount of the borrower‘s income: reliable and constant income increases the confidence of lenders and therefore the obtaining of the second mortgage.
- the level of the borrower‘s credit rating: the higher the credit rating, the more the borrower will be able to claim a low-interest rate.
- the property: must make it possible to guarantee the reimbursement of payments if the borrower fails to respect them himself.
What are the costs associated with a second mortgage?
The real risk taken by the lender of the second mortgage may generate costs so that he can ensure certain security:
- notarized fees
- legal fees
- appraisal fee
- insurance costs.
Be aware that the fees are negotiable! In general, the total costs of a second mortgage will be between 1% and 5% of the loan granted.
What is the interest rate for a second mortgage?
As the lender of the second mortgage comes second when it comes to repayment, his risk is higher. Indeed, if the owner no longer makes his payments, the lender of the first mortgage will be reimbursed first, then after the lender of the second mortgage will be reimbursed, but perhaps only partially. A higher risk, therefore, translates into a higher interest rate.
Thus the interest rates of second mortgages are higher than the rates of ordinary mortgages, first position.
The estimated interest rate range for a second mortgage is between 8% and 15%.
To shop around for a first mortgage loan, quickly compare the rates available on the market:
Is it possible to make a second mortgage in case of bad credit?
The second mortgage is much easier to obtain than the line of credit for people with bad credit.
In addition, you can turn to many private lenders, who very regularly grant second mortgages even to people with a bad credit score, knowing that it is always possible to quickly increase your credit score.
In the event of a bad credit rating, what matters to obtain a second mortgage is the ratio between the loan and the value of your property: your mortgage debt must be less than 80% of the value of your property.
What are the advantages and disadvantages of the second mortgage?
The second mortgage can represent a number of advantages but it also has some disadvantages, here are some examples below:
- many choices between lenders
- up to 80% of the equity in your property granted
- avoid paying your current mortgage (often at a low rate) and therefore avoid paying penalty fees
- higher interest rates
- possibility of seizure if non-payment of loans
- reimbursement can be requested very quickly (1 year) even if the amortization can be long (25 years)
Which providers offer second mortgages?
There are several providers offering the second mortgage opportunity. You have the choice of turning to banks or institutions, or to a private lender.
Here is a list of banking institutions offering or not offering second mortgages:
three options for buying a new property:
- financing between properties
- multi-residential mortgage
- second property financing
- up to 80% of the value of your property
- Bank of Montreal minimum of $10,000 and up to 80% of the value of your property
- personally tailored installment plan
- choose the payment frequency
- payment spread over a period of 1 to 25 years
- Twice a year: possible to postpone up to one month of payment.
- Scotiabank choose the payment frequency
- offer of reliable and conventional financing
- up to 80% of the value of your property
Private second mortgage providers
Often second mortgage lenders are private lenders. Indeed, banks and institutions are more afraid of the risks that may arise in the event of a loan from a second mortgage.
Certain private lenders, capable of assuming these risks and having a taste for double-edged bets, are therefore the choice of a large number of borrowers.
However, be aware that private lenders, geographically dispersed throughout the territory, play by their own rules. Indeed, these private second mortgage lenders will have a very high sensitivity to the remoteness and geographic location of the property in question.
Fees and rates for the second mortgage will then often vary according to the geographical preferences of the lenders (rural/urban).
What are the alternatives to the second mortgage?
The second mortgage represents an interesting option in the search for financing, however, there are also other possibilities with their own advantages and disadvantages.
It’s up to you to choose what best suits your situation, your needs, and your ambitions. For example, to find the most suitable mortgage rate, do not hesitate to compare your options using our free online comparator:
The reverse mortgage
Depending on your situation, the reverse mortgage is a more attractive option.
The reverse mortgage is a loan secured by the value of your property, just like the second mortgage. However, the reverse mortgage allows the owner not to have to make regular payments until the property is sold or moved.
Here are some advantages and disadvantages of the reverse mortgage:
- the title is retained by the owner
- no monthly payment
- the amount of income is not taken into account
- up to 55% of the property value possible in the form of tax-free cash
- higher interest rates
- eligibility from age 55
home equity line of credit
The home equity line of credit may be a more attractive option than the second mortgage.
The interest rate for a home equity line of credit will be lower, but it will be more difficult to obtain.
