Q&A on Second Mortgages

Considering a second mortgage in Toronto as a refinancing option or a way of making up the difference on a down payment? Confused about interest rates and PMIs or PITIs? Keep reading for a list of frequently asked second mortgage questions and the answers you need to help in making wise mortgage decisions.

What can I use a second mortgage for?

Most first-time home buyers in Toronto use a second mortgage in conjunction with the first mortgage as a way of making a down payment on their first home and avoiding the high costs of private mortgage insurance.

On the other hand, established homeowners use second mortgages as a way of tapping into the equity they’ve grown in their home and paying for expenses like cars or college tuition without the high-interest rates charged on high personal loans.

Can a mortgage lender charge me a higher interest rate if I’m obtaining a second mortgage from a different lender?

There is no valid reason for a first mortgage lender to charge a higher interest rate because the borrower is also obtaining a second mortgage. Most lenders do not charge a higher interest rate when a second mortgage is involved.

Having a second mortgage makes the first loan safer. The reason is that both the borrower and the second-mortgage lender are interested in keeping payments on the first loan current. If the borrower defaults, the second-mortgage lender often makes the payments on the first loan to avoid being wiped out by foreclosure by the first lender.

I can get a second mortgage. If I opt for a balloon mortgage, should I do it?

If you don’t pay off the balloon payment when it’s due, you would either lose the house or have to sell it. If you have to get a balloon mortgage, opt for one with a longer-term loan so you have more time to refinance. Your goal is to sell, renegotiate or refinance the mortgage with another lender before that major balloon payment is due. Otherwise, you could be in hot financial water.

If the first lender doesn’t know about the second mortgage, is that legal?

An unrecorded or “silent” second mortgage is essentially fraud on the first mortgage lender. It does happen in the real estate market, and lenders will rarely prosecute the lender, seller, or borrower. However, an unrecorded silent second mortgage can be dangerous for you. If you don’t record it and if the lender doesn’t honor your payments, you don’t have the legal backing of a recorded and secured mortgage.

What are the advantages and disadvantages?

There are advantages and disadvantages to 2nd mortgages. Second mortgages can help repay your debt. It can also help finance your high education costs. It can also help save some money in tax by claiming the interest on the loan as a deduction in the itemized deduction. Interest on a second mortgage can be tax deductible up to $100,000 of the loan amount. According to industry experts, many times fixed interest rate of a second mortgage allows you to save up to 3 times more than the minimum payments on credit cards. Always consider refinancing your second mortgage into your first when possible.

Some of the disadvantages of 2nd mortgage are that it comes with a higher interest rate than the primary or the first mortgage. Since the second mortgage will not be paid until the first mortgage is paid in case the borrower defaults. the second mortgage is often riskier for the lenders. The second disadvantage with a second mortgage is it comes with hefty fees. So it is often advisable to ensure the intended use of the second mortgage is well worth the risk. Second mortgages can often be found with either your existing bank or from your primary mortgage lender.