Second Mortgages in Canada

A second mortgage is essentially a mortgage loan that is taken out after a previous mortgage is already in place. Usually second mortgages in Canada are used for different reasons than the first. That is, when a borrower realizes they have equity in their property and can use the value owned in their home as collateral in case of default. This means, when people start owning equity in their property they can receive large loans at lower interest rates than credit cards for example. Many people take out home equity lines of credit as second mortgages and even sometimes go for private mortgages. The term “second mortgage” is used because the loan is second in priority in case of default. This means that if a borrower defaults, the first mortgage will be paid off before the second.

What are the advantages of a second mortgage?

Depending on the type of loan you take out as a second mortgage there are several advantages. A lot of the time a home equity line of credit is taken out as a second mortgage and often has lower interest rates than other types of credit. The cost of borrowing for a second mortgage is usually lower than using credit cards and other types of loans because the borrower is putting up the equity in their home as collateral.

Why take out a second mortgage?

Why would anybody want to take out a second mortgage? Usually a second mortgage is taken out when a borrower needs a big sum of money. Private mortgages or home equity lines of credit have lower interest rates than credit cards and other forms of credit.

Taking out a big sum of money requires the borrower to put up collateral and property is usually holds the value that is needed as collateral against default. When borrowing against the value of a home a borrower can get bigger amounts in their loans.

Many second mortgages are used for:

  • – Debt Consolidation
  • – Home renovations
  • – Home equity lines of credit
  • – Buying more property

Disadvantages of a 2nd mortgage

Second mortgages can be pretty risky in terms of creating more debt. Interest rates will be a bit higher than the first mortgage because the first mortgage has priority on the collateral should the borrower default. The rate will be lower than alternate loans but when putting up a home as collateral with two mortgages the first loan will always have priority.

Perhaps the riskiest disadvantage is the possibility of foreclosure on a borrower’s home. If there is a problem paying back the first or second mortgage, a borrower’s home is at serious risk. It’s important to analyze this risk before entering into a second mortgage agreement or the results could be disastrous. However generally speaking using your home equity for a loan is most often a very safe bet.

A borrower may also have to pay high mortgage fees on a second mortgage. For someone to prove they’re a good candidate for another loan against their home they will need to do whatever is asked of them. This will mean paying for appraisal fees, application costs and other closing costs associated with the loan. Sometimes the fees alone are enough to make a second mortgage not worth the trouble.

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