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What is a second mortgage?: How it works

Depending on his financial situation and his previous financial transactions, a borrower may need to obtain new credit or make a credit consolidation, in addition to a first mortgage loan.

The second mortgage allows the use of real estate held as collateral despite the existence of a first mortgage.

If the second lender has a solid guarantee, the borrower enjoys several advantages in subscribing to a second mortgage loan.

As a specialist in the repurchase of credit and the mortgage loan, Master Finance gives you some clues on the definition, the advantages, and advice to better understand what a second-degree mortgage means.

Definition of the second mortgage

The second mortgage, also called second position mortgage, allows an owner to use a property already mortgaged as collateral, to obtain a new loan or a loan buy-back. The second rank mortgage guarantee is in addition to the first rank mortgage credit.

In the event of non-payment and seizure of property, the first creditor remains in priority over the others.

The lender (bank) of a second mortgage accepts the risk of not being able to benefit from the guarantee (fruit of the real estate sale) after its counterpart, but before the other creditors. The notary will distribute the money from the real estate sale by strictly respecting the order of the ranks of the creditors.

This type of operation is often performed within the framework of a repurchase of credit while maintaining an advantageous loan of its mortgage credit (loan with zero rate – PTZ, loan social accession – PAS, loan savings housing, etc).

First or second rank mortgage, it is essential to call on professionals to receive advice on the solutions adapted to your situation, contact Master Finance to find out more.

What are the advantages of a second mortgage loan buyout?

The principle of second-degree mortgage credit resembles a first-rank mortgage credit. However, a 2nd mortgage loan meets a need for a rather different situation where the borrower has taken out several loans. There are 3 advantages to subscribing to a 2nd rank mortgage loan:

  • maintain an attractive loan rate  ;
  • prolong a real estate investment will ;
  • get a good loan buyback offer.

Maintain an attractive mortgage rate when buying real estate via a mortgage loan, it is likely that you benefited from an attractive loan rate.

Indeed, depending on your resources and your property, you may have benefited from a low mortgage rate. thanks to incentive advantages such as the zero-rate loan, social accession loan, or simply because the situation allowed it.

With a second mortgage, you keep this attractive rate.

Prolong a real estate investment

In the context of a need for additional credit, you can take out a second mortgage with the same financial institution for the first mortgage loan. It is also possible to appeal to a different organization.

However, by turning to a secondary banking institution, you make this creditor run a risk of higher rank, the second rank, sometimes causing an increase in credit rates.

Get a good loan buyback offer

If you are looking for the best loan buyback offer, you should consider putting real estate as collateral. It will reassure the lender and obtain a better offer in terms of loan duration or rate.

These advantageous conditions will be easier to obtain with low outstanding capital and resources consistent with the amount borrowed.

The second mortgage has certain advantages but also has certain disadvantages, such as the increase in the risk factor of the borrower linked to the rank of the mortgage, the difficulty in fully negotiating loan conditions, etc.

A second mortgage refers to a second loan that is granted on the same property. Second mortgages can be provided by the same lender as the first, but are more commonly provided by a new lender who has different borrowing terms. 

Summary of second mortgages

 Interest rate8–15% Although second mortgage interest rates are higher than first mortgage rates, they are still lower than most car loans and credit card interest rates. It is therefore important to shop around for your second choice mortgage rate.

Why would I need a second mortgage?

Some people would get a second mortgage in one of two scenarios:

  • Purchasing a home: The first lender can only finance a purchase up to 60% of the loan to value ratio but will offer an attractive interest rate. However, if the buyer requires a greater amount of capital for the purchase of his/her dream home, he/she would need to obtain a second mortgage on the same property with another lender at a higher rate. This is often the case when the buyer has a bad credit rating.
  • Refinancing a home: When a refinance is done before the end of the term, the owner must pay a refinance penalty and this can be very expensive. In some cases, it may be cheaper to take out a second mortgage at a higher rate rather than pay the penalty.

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Disadvantages of a second mortgage

For a lender, being second on the title of a house is a riskier situation. In the event of a homeowner defaulting on a loan and the home is taken into possession, the lender in the first position will always be the one paid first. To compensate for the added risk of being the second to get paid, mortgage rates on a second mortgage are logically higher. Second mortgage interest rates can be as low as 8.25% and increase depending on your application. The average interest rate is around 12%.

Second Mortgage vs. HELOC – Which is Better?

Second mortgages and HELOCs both have higher interest rates than conventional mortgage rates. However, the second mortgage rate can be even higher depending on how much equity you have in your property. A HELOC requires you to have a minimum 20% stake in your property.

The advantage of having a HELOC is that you only pay interest on the funds you use. Plus, your payments interest only. With a HELOC, however, you pay a higher interest rate to access the funds. If you don’t anticipate major expenses in the near future and you have a good credit score, getting a lower rate from a traditional lender can save you thousands of dollars.

On the other hand, if you have a bad credit rating, you may not qualify for full financing from a traditional lender. In this case, the search for a second mortgage becomes inevitable. Depending on your financial needs, both of these products might do the trick. Speak with a mortgage broker to assess your case.

Since the second lender takes more risk, not all lenders offer this type of mortgage. It depends on the risk tolerance of each lender. Although each lender will have unique terms and conditions, here is a list of major banks according to second mortgage loans:

Use a second mortgage to consolidate your debts or do credit score improvements

A second mortgage can be a great way for homeowners to consolidate their debts. Although second mortgages often carry higher interest rates than first mortgages, these rates are still often lower than high-interest credit cards, car lease payments, or lines of credit not guaranteed.

Since second mortgages are often not reported to the credit bureaus, you can benefit from this ‘forgetting’ about 80% of the time. If you use a second mortgage to consolidate your debts and help you meet your financial commitments on time, it can improve your credit rating and eventually qualify you for a mortgage with a traditional lender.

How do I qualify for a second mortgage?

  • Level of Equity: The greater your equity in your home, the greater your chances of success in qualifying for a second mortgage. If you are buying a house, making a higher down payment lowers the risk for the lender.
  • Your income: Lenders want to verify that you have a reliable source of income to ensure that you can make payments on time.
  • Credit score: The better your credit score, the better your interest rate will be.