What are the different types of second mortgages?

• November 1, 2022

When buying a property, most people rely on a mortgage. But once a house is acquired, some homeowners may decide to take out a second mortgage.

Depending on the borrower’s financial situation and past financial transactions, it may be necessary for the borrower to obtain a new loan or undertake a loan consolidation, in addition to a first-class mortgage.

Second mortgage definition

A second mortgage allows the owner to use a property already mortgaged as collateral in order to obtain a new credit or a buyback credit.

In the event of non-payment and foreclosure, the first creditor has priority over the others.

The second mortgage lender (bank) accepts the risk of not being able to benefit from the guarantee (due to the sale of the property) until after its counterparty, but before the other creditors. The notary will distribute the funds resulting from the sale of the real estate in strict compliance with the hierarchy of creditors.

This type of activity is usually done as part of a loan buyback while maintaining a loan that benefits from your real estate credit.

But what’s the point? How does it work? What distinguishes it from a premium loan? You are told everything so that you know if this solution is made for you.

First vs. Second Mortgage: What is the difference?

A second mortgage is simply an additional mortgage on the same property. The loan can be granted by the same financial institution that originally accepted the loan. This can also be done with another bank.

A second mortgage differs from a first mortgage in several respects, including:

• Current interest rates;
• Eligibility conditions;
• Maximum borrowing capacity;
• Refund order.

On the latter point, it should be noted that the second mortgage will be repaid after the first in the event of default. As a result, this poses more risk to the private lender.

How does a second mortgage work?

A second mortgage is secured by the net value of your property, or the difference between the value of your house and the amount of the mortgage left to pay. For example:

In terms of creditworthiness, this second loan must be repaid in the same way as the original loan. This means that in addition to paying your second mortgage, you must continue to make payments on your first mortgage.

Usually, the duration of a second mortgage varies between one and two years, during which time you only pay interest. At the end of the term, you will have the opportunity to extend the loan or repay it in several installments.

In case of non-payment, your house can be seized to repay your creditors. The original mortgage will then be repaid first, followed by the second.

A higher interest rate

Because it will not be repaid first in the event of insolvency, a lender who agrees to grant you a second mortgage carries a higher risk. That is why interest rates are higher than on a first mortgage.

In addition to these higher rates, you may be required to pay various administrative fees, such as:

• Evaluation costs;
• Title search costs;
• Cost of securities insurance;
• Legal expenses.

Why ask for a second mortgage?

You may be wondering why someone would want a second home mortgage. You should be aware that there are several possible reasons for such a decision, including:

• Renovation;
• Debt consolidation with a higher ratio;
• Unforeseen expenses;
• The need to buy an additional car;
• The need to buy a second house before the first is sold.
• Obtaining a second mortgage has certain advantages, including:
• High probability of obtaining a loan if your property has a sufficient net worth;
• Access to credit with better interest rates than other types of credit;
• Type of choice, because many lenders offer this type of loan.

What are the advantages of a second mortgage?

The principles of a second mortgage are the same as those of a first mortgage. A second mortgage, however, fills a need for a rather different situation where the borrower has already made several loans. There are three advantages to getting a second mortgage:

• Maintains an attractive lending rate;
• Broadens the will to invest in real estate;
• Has received a good offer of repurchase of credit.

1. Maintain attractive mortgage rates

When you buy a property through a mortgage, you are likely to benefit from attractive mortgage interest rates.

Indeed, depending on your wealth and resources, you may have benefited from low mortgage rates through incentives like zero-interest lending, low-cost housing lending, or single-family lending, simply because economic conditions permit.

With a second mortgage, you keep this attractive rate.

2. Extending real estate investments

If you need more credit, you can get a second mortgage from the same financial institution that offered the first mortgage. Complaints can also be made to another body.

However, when you switch to a second-tier bank, in the eyes of that creditor, you run the risk of getting a higher and second-tier credit rating, which sometimes raises your credit rating.

3. Get a good buy-back loan offer

If you are looking for the best buy-back loan offer, consider using a property as collateral. This will reassure lenders and get a better offer on loan terms or rates.

In the case of first- or second-class mortgages, it is essential to rely on experts to get advice on solutions tailored to your situation.