A second mortgage is an additional financing option that can be taken out on the same property where an existing mortgage already exists. Essentially, it is a loan that is in second priority to the first mortgage on the same property. There are different types of second mortgages available in Canada, but the most common one is a Home Equity Line of Credit (HELOC). With a HELOC, borrowers can access funds up to a predetermined credit limit, using their home as collateral.
A second mortgage can also be used to buy a second property, such as an investment property, or even a cottage. When a second mortgage is used to buy a second property, the borrower is required to put down a down payment of at least 20% of the purchase price. However, if the borrower or a family member plans to live in the second property rent-free, a down payment of less than 20% may be allowed. It’s also important to note that the Canadian Home Buyers Plan, which allows borrowers to use their RRSPs towards a down payment, doesn’t apply to a second property.
One of the most common reasons people choose to take out a second mortgage is to consolidate debt. By using the equity in their home to pay off high-interest debt, such as credit card balances and student loans, borrowers can potentially save money on interest charges and focus on repaying a single loan. This approach is particularly attractive for borrowers who have a lot of high-interest debt that is making it difficult to keep up with monthly payments.
Another reason people choose to take out a second mortgage is to fund a major purchase, such as a home renovation or their child’s education. By accessing the equity in their home, borrowers can potentially access a lower interest rate than what is typically offered for unsecured loans.
It’s important to understand that taking out a second mortgage does come with some risks. First and foremost, if the borrower is unable to make their payments on time, they could risk losing their home to foreclosure. Second mortgages also come with higher interest rates than first mortgages because they are considered riskier by lenders. As a result, borrowers need to be prepared to make higher monthly payments on their second mortgage compared to their first mortgage.
Before deciding to take out a second mortgage, it’s important for borrowers to consider their unique financial situation and goals. For some people, a second mortgage may be a good option, but for others, it may not be the best choice. Borrowers should speak to a financial advisor or mortgage specialist to discuss their options and determine whether a second mortgage is the right move for them.