What is a second mortgage?

A second mortgage is a loan that uses a property, which already has a mortgage on it, as collateral. It is often used to pay off higher interest debt. And it is also used to fund higher return investments.

To understand this better, let’s understand mortgage ranking. A first mortgage means that the mortgage was registered first, or before any other mortgages on the property. A mortgage registered after the first mortgage is a second mortgage. The same with a third mortgage. If the borrower defaulted on the first mortgage, the first mortgage lender would begin the power of sale process to recover the money owing. After the property is sold, the remainder of the process go to the other mortgage holders, such as a second mortgage lender. There is a risk being the second lender since there might not be enough money left to pay the full second mortgage. To offset this risk, the second mortgage lender will typically charge a higher interest rate. Now that you understand the lender’s perspective. Look at how this concept could be used by you.

When is a second mortgage helpful? Well, let’s look at a typical scenario. Let’s say you own a property worth $500 000. And you have a mortgage (first mortgage) of $300 000 on it. This means you have $200 00 of equity in your property. Recently, you went through a terrible family emergency or job loss and have accumulated $50 000 of debt on your credit cards. The interest rate on those credit cards are around 20% per annum. So you talk to your mortgage agent, Angeline Fernandes. She explains how you can use the equity in your home to get a second mortgage and pay off your credit cards. You can do this even if you aren’t near your first mortgage renewal date. She gets you a second mortgage for $50 000 at 5% per annum. You use it to pay off your $50 000 credit card debt at 20% per annum. In just three years, this saves you about $22 500 in interest. This example is simplified, but it shows the very real benefits of lowering the interest you pay on debt. If you are looking for a second mortgage, talk to someone who has access to multiple second mortgage lenders. Contact me today to get a personalized solution to your unique situation.

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