What is a second mortgage & how can it be a viable solution?
Most people when they think of a second mortgage think of high rates, huge fees and an image of a loan shark who you will be tied to for the foreseeable future. While some of this might be true we want to take the stigma off the meaning of second mortgage and how they can actually benefit you.
Let’s start with what a second mortgage actually is:
A second mortgage is a mortgage places on a property which is already encumbered (mortgaged) with one mortgage. Determination of first, second, third mortgage etc is determined by priority of registration (time and date when it was registered against the property.)
What that means is if you have a first & second mortgage on your property – if for some reason you went into default – the mortgage in first position will recoup its money first followed by the second mortgage. The second mortgage would not get paid (or they would not recoup the loan they leant on the property) if there was not enough money to cover the cost of the first. That is what makes second mortgages more expensive (higher interest rates) than first mortgages because there is a higher risk for the lender.
How can a second mortgage help you?
Remember the blog we put out earlier this year: Breaking Bad: Beware The Banks & The Dark Side of Breaking Your Mortgage Early? Along with many “no frills” mortgages that are being offered like the old Investors Group 1.99%& BMO’s 2.99%, the need for second mortgages is growing and can help you access equity in your home without being forced to sell or pay a huge penalty when breaking your existing mortgage. Even if you are willing to pay the penalty for breaking, new government refinancing rules will only allow you to access up to 80% of the equity in your home. Second mortgages through private lending can help you to access the equity over and above that 80% if you need it.
Lets look at it this way:
You need money for an emergency, a new roof, daughter is getting married, you may have lost your job & with no income you can’t get approved at a bank. Your savings just aren’t going to cover everything. Your credit card bills might be piling up and you can’t seem to get ahead of them and with interest rates of 19.99% to 29.99% who could! You want to refinance your house to help increase cash flow & pay down debts but the term on your mortgage isn’t up for another 2 years & they want $20,000 as a penalty for breaking it so the math just doesn’t add up to make it worth it. You could access the equity as well if you were to sell your house but if you have a $400,000 home the costs can add up. 5% for realtors – another $20K plus HST, moving costs, land transfer costs ($4,000-$8,000,) lawyers’ fees, the breakage on your mortgage – $20,000 if you aren’t able to port it and that doesn’t even cover the cost of your stress & time trying to find a new home.
The Solution & How it Works:
Through private lending we can help you with a second mortgage to keep you in your home & increase your cash flow. We can even get you’re a private second mortgage to help go towards your down payment to avoid CMHC costs. Maybe your credit needs help or you are self-employed and can’t get a mortgage with only 5% or 10% down. Second mortgages are generally interest only meaning if you have $20,000 worth of credit card debt you are probably paying a minimum of $600/month. With a second mortgage you would be paying $200 increasing your cash flow by $400 a month. Little to no income proof documentation is needed and we can usually have the money to you in 10 business days.
- To start the process we would need to establish how much equity you have in your home & this can be done with a copy of your existing mortgage (or home you would like to purchase plus what you have as a down payment) and an appraisal of your property.
- Once we have those 2 things you will need to meet with a lawyer so they can register the second mortgage on your property and you pick up your money.
- Terms are generally 1 year-long and are interest only payments meaning you are not paying down the principal amount on the second mortgage. Depending on your situation we can then help you refinance your home without all the costly penalties and roll or add back the second mortgage into one mortgage with better terms & interest rate.
The Benefit: You got access to the equity / money you needed in a short amount of time, increased your cash flow to help manage your debt / expenses, you didn’t spend years trying to build your credit & save for that extra 10% down payment so you wouldn’t need to ensure your mortgage.