A second mortgage typically refers to a secured loan (or mortgage) that is in second place to another loan against the same property.
In real estate, a property can have multiple loans or liens against it. The loan which is registered with the province first is called the first mortgage or first charge against the property. The lien registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are much more rare.
Second mortgages are called subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage. Thus, second mortgages are riskier for lenders and generally come with a higher interest rate than first mortgages.
In most cases, a second mortgage takes the form of a home equity loan and the two are synonymous, from a financial standpoint. The difference in terminology is that a mortgage traditionally refers to the legal lien instrument, rather than the debt itself.
The term length of a second mortgage varies. Terms can last up to 30 years on second mortgages; however repayment may be required in as little as 1 year depending on the loan structure.
A second mortgage can occasionally be the catalyst to foreclosure when a homeowner defaults on their loan. The second lien holder then purchases the primary mortgage (which may still be in good standing) and then forecloses which leaves the homeowner losing their home to the 2nd mortgage lender.
Why get a second mortgage:
- Refinancing to consolidate high interest debts
- Pay for unexpected expenses
- Renovate their homes
- A second mortgage does not replace your existing first mortgage
- Repay and eliminate judgments or unsettled collections
- Opportunity for you to invest in stocks mutual funds or business investments
Advantages of a second mortgage:
- It is a second position mortgage which is advantageous if you currently hold a favorably low rate first mortgage and do not want to discharge due to penalties, fees, etc.
- Second mortgages can also be arranged with greater ease due to the amount of lenders available both institutionally and privately.
- Borrower qualifications are usually based more on home equity rather than credit and income
- Flexibility-most second mortgages are interest only payments and 1 year terms
- Up to 90% of Home Value can be used to arrange a 2nd mortgage