What's our Second Mortgage?
WHAT IS A SECOND MORTGAGE?|
To many of us purchasing property is going to be the biggest
investment of our lives. To fund this most will need to agree to
provide a mortgage. From time-to-time, however, circumstances will
arises in our lives when we need to think about getting a
second mortgage on our property. So: what exactly is a
second mortgage; and, possibly more importantly, why would you
even consider this financing option?
What is a second mortgage?
Simply put, a “second mortgage” is security that you
provided to a lender in consideration for that lender agreeing to
provide you with a loan, i.e. it’s a secured loan. The security
you agree to provide the lender is a charge over your property.
However, as you have already agreed to provide another lender with
a “first mortgage”, a second mortgage gives your new lender
a second bite at the security cherry – your property, i.e. they
agree to be paid-out of the proceeds, following any sale of the
property, subsequent to your existing lender.
What types of second mortgage can I get?
From the outset it important to note that a second mortgage
is a security agreement – not a debt one - although it can
sometimes be difficult to tell the difference. The reason why it
is called a second mortgage is because the security given
is a second charge over your property (home). Consequently, a
second mortgage can be provided for almost all types of debt,
from a home improvement loan to debt consolidation.
What’s the difference between a second mortgage and second
None – a second rank mortgage is a second mortgage by a
different name. However, as you already have an existing mortgage
over your property, it is usual to call this a “first rank”
mortgage – meaning that any subsequent mortgages you get will rank
subsequent to the first. Therefore, it is possible to have second,
third, etc., mortgages.
Why would I want to get a second mortgage?
There are almost as many reasons why you would want to have a
second mortgage as there are reasons to borrow! As mentioned
above, in reality a second mortgage is a charge over your
property in consideration for money borrowed by you. Consequently,
you may wish to get a second mortgage to fund:
* Home Improvements
Property owners who wish to improve their homes are probably the
main reason why second mortgages are given. Here, home
improvements may be taken out for a number of reasons, from
improving the kitchen to extending the house.
One thing to note: strictly speaking a home improvement loan,
secured by a second mortgage, differs from all other
second mortgage loans as the increased value of the property
(because of the home improvement) is usually taken into
consideration when the lender agrees to provide the loan.
You want to improve your home by building a greenhouse, which will
increase the value of your home by $10,000. Because of the
increase in the value of your home, the bank agrees. However, in
return for agreeing to this, the bank asks for a second
* Debt Consolidation
With the easy availability of credit these days, the second reason
why second mortgages are often provided is because debtors
wish to consolidate their debt. Here, what property owners agree
to do is convert their expensive unsecured loans into a less
expensive secured loan.
You owe $10,000 on your credit cards and your credit card
companies are charging you 15% for this debt. The bank agrees to
lend you $10,000 dollars at 10%, to repay your credit card
companies, in return for you providing them with a second
mortgage. Taking out the loan to repay your credit card debts
equates to debt consolidation.
* Personal Loan
There may be a number of reasons why a property owner would like
to provide a second mortgage in return for a person loan.
Chief among these reasons, however, is in order to pay for the
education costs of their children. In this case the borrower
usually has equity (i.e. the value of their property exceeds the
outstanding debt under the first mortgage) in the property and is
trying to borrow against such equity.
Borrower wants to pay for the university costs of their child. The
bank is willing to lend the borrower $30,000 on the equity value
of their property, in return for which the borrower agrees to
provide the lender with a second mortgage over the
Can any property owner get a second mortgage?
No – it is important that you check with the lender to whom you
gave a first rank mortgage before agreeing to provide a second
mortgage. Having said that, if you have any equity value in
your property, it is likely that your first rank lender will agree
to you providing a second mortgage.
What happens if I default on my payment?
By providing you with a loan secured by a second mortgage,
your new lender agrees to subordinate themselves to your first
lender. In effect, what this means is that your first lender will
be repaid their outstanding debt before your new second lender. As
such, it is commonly the case that if you default on your loan,
your second mortgage lender cannot enforce against the
security until such time as they have received permission from
your first lender to do so (although you will need to check your
loan agreements to make sure this is the case in your case).
Will a second mortgage become a first mortgage?
Yes: in the event that you repay your first mortgage lender, if
you still owe money on your second mortgage loan, your
second mortgage will be promoted in order to a first mortgage.
How much will a second mortgage cost?
Aside for the additional risk of losing your property, the costs
associated with a second mortgage are usually the reason
why most borrowers are put off by this type of financing. In
short, if you decide to pursue a second mortgage, you’ll be
expected to pay for:
* a survey of the property to determine its value;
* government fees for registering the second mortgage –as
well as any other costs (e.g. legal fees, title, escrow…etc);
* a slightly higher rate of interest than you are currently paying
on your first mortgage – to account for the additional risk – but
usually this will be less than is the case with an unsecured loan.
Without doubt second mortgages are an extremely useful
means of obtaining funds; however, you do need to consider all of
the issue to-hand. Hopefully the above shows you some of the
benefits and pitfalls of providing second mortgages.
If you would like to apply for Second Mortgage, please