What are Second and Third Mortgages?

A second mortgage is a loan that is placed as a second charge behind the bank’s first mortgage (your current mortgage) and secured by the existing equity in your home.

Second mortgages are provided by a different lenders, as the first lender will not issue a second mortgage in most cases.

Once the second mortgage is in place, you will now be responsible for 2 payments – first mortgage and second mortgage.

Why do second mortgages have higher rates?

Simple answer is they carry more risk for the lender and the lender increases the rate to compensate the risk taken.

Second mortgages pose more risk to the lender because as the term indicates, they are in second place. If you cannot meet your obligations to make payments and the property goes into foreclosure (property is sold to pay off the loan), the first mortgage lender has priority to be paid out from the sale before any (remaining) funds go to the second mortgage lender, hence the higher risk factor.

How much can I borrow?

In most cases you can borrow up to 80% loan to value (LTV) of the appraised value of your property. The second mortgage amount would be the 80% LTV of the value minus the current first mortgage amount.

 

Example:

Sandy would like to renovate her home and is looking to refinance her house to unlock the equity to fund the project. Recently appraised at $600,000 with the remaining mortgage balance of $300,000.

Here’s how the lenders will do the calculations to establish maximum amount for the Second Mortgage take out:

Appraised Value

Maximum Refinance is 80%

Remaining 1st Mortgage Balance

Equity Available

New 2nd Mortgage Amount

$600,000

$480,000

$300,000

$300,000

$180,000

 

Maximum 2nd mortgage take out is $180,000

There are different Second mortgages, and qualifying criteria can be much easier than the 1st mortgage. In many cases lenders won’t be qualifying you based on your credit rating, employment stability, repayment history or credit worthiness.

The most important factor is to have an equity in the home and loan can be set up quickly and efficiently.

Payments are also can differ depending on lender and how the Second mortgage was set up.  The most common scenario is interest only payment allows to have minimum monthly payment.

 

Example:

Second Mortgage Amount

Annual Interest Rate

Annual Interest Payment

Monthly Interest Payment

$180,000

8.95%

$16,110

$1,342.50

 

Third Mortgages are done as Seconds. If you already have first and second mortgages in place, you can get a third mortgage providing there is enough equity in the property.

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