Whether you're an experienced homeowner or buying for the first time, mortgages are a complex and often daunting topic. That complexity only increases when discussing a second mortgage. In this informative piece from industry expert Sam Kamra, you'll find everything you need to gain a quick understanding of second mortgages.
The Ins and Outs of a Second Mortgage
A second mortgage is a secondary loan/mortgage registered on the title of a property. Similar to a first mortgage, a second mortgage is a mortgage registration for a loan borrowed, secured by real estate. The difference between a first mortgage and a second mortgage is the rank and priority of the registration. While a first mortgage, as it sounds, is a mortgage registered as the first priority loan on the title of a property, a second mortgage is a secondary loan registered on title.
A second mortgage can also come in the form of a home equity line of credit (HELOC), registered behind a first mortgage, however, most institutional lenders offering HELOC's are reluctant to register behind another institution’s first mortgage charge.
How to Get a Second Mortgage?
A second mortgage is fairly easy to qualify for, as lenders typically approve the loan based on the equity available in a home, rather than the homeowner’s credit and income. Lenders will usually lend up to 90% loan-to-value (LTV), meaning they will lend up to 90% of the home value.
To calculate the amount of equity a homeowner can access as a second mortgage, first you must determine the fair market value of the home, then multiply it by 90% (or 0.90), and then subtract the first mortgage balance.
The approval process is fairly straightforward:
Confirm property value from a lender’s approved appraisal company Sign and accept the terms of the mortgage commitment
Sign final registration documents with a lawyer
Close and receive your money
What are Second Mortgage Rates Typically Like?
Second mortgage rates vary from lender to lender and are not standardized among all lenders. Second mortgage rates are always higher than first mortgage rates, due to the rank position and risk to the lender. Second mortgage interest rates typically range from 8.99% to 12.99%, on average. The higher the LTV (loan-to-value) the homeowner wants to access, the higher the rate will be, as the reduced equity remaining in the home will pose an increased risk to the lender.
What can a second mortgage be used for?
The average homeowner seeks a second mortgage for the purpose of consolidating high-interest credit card debts, along with other high-interest loans they may have. Lenders usually don’t put any restrictions or conditions for the use of the loan. Common uses of a second mortgage include:
Paying medical expenses
Paying for a wedding
Paying for education
Down payment to purchase a new home or investment property
CRA (Canada Revenue Agency) tax arrears
Mortgage payment arrears
How Long is the Term on a Second Mortgage?
The term of the loan usually ranges from 3 months to 12 months. By default, most lenders offer a 12 months term, however, borrowers may accept a shorter term. Once the mortgage is approaching its maturity, given the borrower(s) have maintained good standings and haven’t defaulted on their mortgage, by missing any payments, they are usually offered a renewal for another term. It is important to note that the renewal is at the sole discretion of the lender.
Is there a Penalty for Early Re-payment on a Second Mortgage?
Most, if not, all, second mortgages come with a closed term, meaning there is a penalty for early re-payment. The penalty varies from lender to lender, however, the average early re-payment penalty is equivalent to 3 months interest.