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Second Mortgage

Second Mortgage

What Exactly is a Second Mortgage?

Most of our investment opportunities deal with second mortgage loans. A second mortgage, put very simply, is a loan request which offers your property as security.

If you have a first mortgage on your property (usually from a bank) then you can “second mortgage” or “borrow” whatever equity you have on the property. The equity is essentially the amount you have already “paid off” from the first mortgage.

For example, if your property is worth $600,000 and you have $200,000 left to pay on your first mortgage, you have $400,000 equity. This usually means that $400,000 is the maximum sum you can borrow or “second mortgage”.

Second mortgages are often given out by private lenders to people who cannot get regular bank loans approved for whatever reason.

A second mortgage has the same legal implications as a regular bank mortgage. The property has the loan registered to its title, and the private lender is legally authorized to liquidate the property to recuperate funds if necessary- just as a bank is permitted to do so too. It is called a “second mortgage” simply because it is registered behind an already-existing mortgage on the title.

The only way that a second mortgage is “second to” the first mortgage is in order of payout upon sale. Basically, upon sale, all closing costs are disbursed. The first mortgage is initially paid out in full, followed by the second mortgage. The entire remaining surplus goes to the homeowner. In all other ways, a second mortgage holder has equal rights to a first mortgage holder.

Why Do Canadians Typically Request a Second Mortgage From a Private Lender?

There are 2 answers to this question. The first thing we need to understand is people’s necessity for borrowed funds. Common reasons include:

  • Paying off Credit Cards that have higher interest rates (often 19%-29%) that require large monthly payments.
  • Consolidating debts- combining several unsecured debts into a single, easy-to-manage monthly payment
  • Renovations to existing property
  • Getting a down payment for the purchase of a second property, or to “bridge a gap” between selling and buying a principal residence
  • Debt from divorce proceedings and family issues
  • Business investment- banks can be very strict and reluctant when lending to business owners.

The second element we need to understand is: “why are they not borrowing from a bank?” People often cite a bank’s lending process as being too slow and bureaucratic, especially if they need the funds quickly. Other common reasons given are as follows:

  • Applicants may not be willing to meet all the bank’s criteria. For example, a bank may require the applicant to close other credit facilities or discharge other encumbrances on the property. The applicant may not be willing to comply with these demands.
  • Alas, most borrowers are seeking funds from private lenders simply because they have been denied a loan by their bank. The applicant may have damaged credit or financial challenges for meeting the bank’s income ratio requirements. Canadian banks have increasingly stringent criteria for loan applications that may be forcing borrowers to look into alternative options i.e. private lenders and second mortgages.
Contact us today to see how easily we can get you your second mortgage!