Second mortgage: Everything you need to know about this type of loan and how to get one
If you’re a homeowner who needs financing, a second mortgage (or second charge mortgage) from a private lender may be the most optimal solution for you.
This alternative to a home equity line of credit is perfect for all those who need cash urgently—be it for an unforeseen expense, major work, debt consolidation, medical bills or a project start-up.
Second mortgage: What is it and who’s eligible?
As suggested by its name, a second mortgage is additional financing that’s taken out from a second lender and guaranteed by real estate that already has a mortgage on it.
There must be a significant amount of equity accumulated on that property. This net value is the difference between the market value of the building and the lot, and the balance remaining to be paid on the first mortgage. To protect lenders—and buyers too—the combined total balance of the first and second mortgages cannot be more than 75% of the property’s market value.
If your residence is worth $500,000 and the capital to be paid back on the initial financing is $200,000, then you could get a second mortgage for $175,000. You would then have a total amount of financing of $375,000 (75%) and a net value on the property of $125,000 (25%).
Unlike financial institutions, which require a credit investigation and have strict criteria on the borrower’s income, private lenders like Victoria Financial give more importance to the transaction’s intrinsic value. A second mortgage may be highly useful to entrepreneurs, self-employed people or others not entirely meeting the criteria of conventional financial institutions.
Poor credit file: Is it still possible to get a second mortgage?
Yes. It is possible for a borrower whose credit file isn’t spotless to get a second mortgage because a private lender’s primary consideration is the net value of the property. A person with a credit rating under 600 who’s looking for a second mortgage may find it very difficult to have their case heard by the banks, but a private lender may be more welcoming.
Obviously, even if a private lender doesn’t have conditions as stringent as the large banks, they must still make sure the borrower is solvent. The main difference is that the private lender has the capacity and the flexibility to adapt to borrowers with a more atypical profile or facing a situation that doesn’t match the service offering of major financial institutions.
What are the major criteria to take out a second mortgage?
With Victoria Financial, borrowers must meet these three major criteria:
- Their property must be a single-family home, a condo or a commercial or income building.
- The property must be located in a serviced urban area.
- The amount of the current mortgage and the second mortgage together must be equal to or less than 75% of the value of the property.
What are the terms and interest rates of a second mortgage?
By offering easier-to-access, flexible financing, the second mortgage lender takes on more risk. For instance, in the event of a payment default, the lender of the first mortgage will be repaid first when the asset is repossessed. For that reason, the borrower should expect to pay a higher interest rate on this type of financing.
However, the second mortgage only requires payment of the interest during the loan period. It’s only at term (generally 1 to 2 years), that the capital must be reimbursed.
So, this can be a valuable financial tool for those expecting a large sum of money in the medium term but who need liquidity now.
Overview of the advantages of a second mortgage
- Gives fast access to significant liquidity
- Has less strict eligibility criteria (e.g. allows for a poor credit file)
- Determining factor for granting the loan is the property’s net value
- Only the interest must be paid until the loan comes to term