Second mortgages: What you need to know
What is a second mortgage, and is it right for you? You may have heard of this product before, but aren’t entirely sure what it means, or if it’s something that could apply to you. Second mortgages are a special kind of mortgage product that suit certain groups of homeowners. Here’s what you need to know about this mortgage, and some key things to keep in mind as you explore it.
What is a second mortgage?
When a person buys a home and secures mortgage financing, they are probably receiving funding for their first mortgage on the property. As the name suggests, this is the primary mortgage attached to the home, and the first one to show up on the title. Most Canadian homeowners just have one mortgage per property. A second mortgage is also just what it sounds like. This is a separate mortgage that is secondary to your first mortgage. It comes up second on the title, and your obligations to it must come second to your primary mortgage. The idea of a second mortgage is pretty easy to understand, but why would someone want one?
What’s the point of a second mortgage?
There are a couple main reasons why a person would opt to secure a second mortgage. Since this is an additional loan, it gives you more available money to use in the short term. This can be handy for people who are in a position where they need access to money they wouldn’t otherwise have. For example, maybe you have a child whose education you want to financially support, and their tuition is expensive. Perhaps you want to complete a big home renovation, and you don’t have the resources on hand to pay for it in your current situation. Another common reason to get a second mortgage is to help consolidate your debt. If you have high-interest debt such as student loans, a second mortgage can help you pay these off more quickly. This will reduce the interest you owe as a result of these loans in the long run.
What are the risks?
Second mortgages are most risky for the lenders who agree to finance them. Your first mortgage must always be your priority, and your financial obligations to it have to come before your second mortgage. This means you will probably have to deal with higher interest rates if you get a second mortgage. Higher rates mean more assurance for the lender, and a larger return on their investment for taking a risk on you. It’s important to ensure you can afford the rates that come with a second loan! Your monthly payments will increase a decent amount between your two mortgages. Make sure this is something you can sustain long-term, because you will be in this situation for a long time if you go through with securing that second product. Finally, remember that you will be incurring more debt and interest in the long run. Second mortgages are great for short-term access to cash flow. However, you must keep in mind that over time, you will end up spending more. This may be worth it if it means you can accomplish your current financial goals, but be sure to weigh the pros and cons first!
Talk to a broker first!
A second mortgage is a major product to secure, and not something you should go through with before consulting a mortgage broker. As experts in the mortgage industry, we can help you determine if this is the best option for you. In some cases, homeowners may be better off refinancing their mortgage to readjust their existing terms, instead of securing a whole new product. Other times, a second mortgage can be a good bet, but you will need a broker’s help to seal the deal. Much like traditional mortgages, we can help you find the right lender to meet your needs and ensure you end up with the perfect product. While you might be tempted to take immediate action, first take the time to meet with a broker, evaluate your situation, and let them guide you through the process.
Second mortgages are certainly useful products for certain groups of homeowners! They offer many benefits, as long as those advantages outweigh the risks. If you think a second mortgage might be the right move for you, be sure to reach out to us first. We are here to help you understand all your options so you can make the best decision.
If you have any questions about your mortgage, get in touch with me!