Second Mortgages: What You Need to Know

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A second mortgage is a loan taken out on a property that is already mortgaged for the purposes of accessing the equity built up in the home. This product can be a great tool for homeowners, but will look a little bit different than the first mortgage. In this week’s article, we are going to explore second mortgages and how they work. 

What Are Second Mortgages Good For?

Second mortgages allow homeowners to access equity otherwise tied up in their first mortgage. While that equity can be used in a number of different ways, the main reasons that Canadians use it is to:

  1. Consolidate Debt. Even second mortgages have relatively low-interest rates. With these lower rates, homeowners can pay down debt much quicker than with credit cards while simultaneously improving their credit score. 
  2. Pay Large Expenses. Post-secondary education and home renovations are big expenditures that can end up paying for themselves in the long run in the form of career opportunities and increased home value. 

Borrowing Amount

Each lender will have different rules as to how much of your equity you will be able to take out. On average, homeowners can expect to access up to 80% of their accumulated equity. Like your first mortgage, it is an installment loan paid back over a fixed term. However, a second mortgage can come in the form of a Home Equity Line of Credit (HELOC) or a Home Equity Loan. The former gives access to equity as revolving credit, much like a credit card whereas the latter is a lump sum.

Lender Considerations

Taking out a second mortgage with a different lender puts them in the second position on your property’s title. If you were ever to default, the lender who provided you with your first mortgage would be paid out first. The one in the second position then risks not being paid out in full. Because of this, not all lenders will offer second mortgages. Those that do tend to offer higher interest rates to compensate for the additional risk. 
Second mortgages are not for everyone, but they can be a great tool to help homeowners access the equity in their homes to meet their financial needs. If you are considering a second mortgage but aren’t sure where to start, give our team at Calgary Source Mortgage a call. 

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