Confessions of a CFP: You may need a second mortgage
As a financial planner clients come and see me for a variety of reasons from investment advice to debt consolidations. On a good day clients can bring me a big lump sum of money to invest and on a bad day clients can be in my office with tears in their eyes because they can no longer provide for their families due to the fact that they have accumulated thousands of dollars in debt that they can’t afford to pay off.
A second mortgage gives you access to cash
There are many reasons why people accumulate debt from over spending and poor budgeting to experiencing a job loss or making a bad investment. When clients are experiencing financial difficulties or need a large amount of money they often turn to their home as a way to free up some extra money because their home is most likely their most valuable asset.
A second mortgage is a new loan in second position on your property title. In simple terms it means that you will have two mortgage loans on one property. If you can no longer afford to make your monthly mortgage payments, the second lender will be paid in second priority if your home is forced into default and needs to be sold at auction. Second mortgages are offered by trust and finance companies, they are not offered by big banks.
The first position bank would be (i.e. your original mortgage loan) would be paid first and if there is money left over after your home is sold your second position lender (i.e. your second mortgage loan) would be paid afterwards. Depending on how much money is leftover from the sale of the home, the second mortgage lender may not be repaid in full. Therefore in exchange for their added risk trust and finance companies charge higher interest rates on second mortgages than first position banks charge on first position mortgage loans.
Consider your options with a second mortgage
According to Cait Flanders of RateHub.ca, a mortgage rate comparison website that aims to help Canadians access the best mortgage rates in the country, second mortgages are most often used as a solution to help clients consolidate high interest debt; but she says that a second mortgage should be a second option for homeowners. “Most of the big banks (initially offer) homeowners a home equity line of credit (HELOC) for debt consolidation.” A HELOC is more advantageous than a second mortgage loan because the interest rates are usually lower and the product offers more flexibility, but if your credit is less than ideal a second mortgage may be your only option. Flanders confirms that “someone with a lower credit score may not be approved for a HELOC and could then consider a second mortgage loan.”
My best advice to clients considering a second mortgage is to make sure you fully understand the financial implications involved when taking out a second lien on your home because that’s exactly what a second mortgage is. It’s a completely different mortgage contract than the original loan, with a new mortgage term, a new interest rate and a new amortization. A second mortgage loan also means a second monthly mortgage payment.
Shop for the best interest rate on your second mortgage
How do you find the best interest rate available? By shopping around and comparing rates between trust and finance companies. Consumers should visit RateHub.ca to find a local mortgage broker in your area who can help compare second mortgage interest rates.
Rate comparison websites such as RateHub.ca exist – to provide Canadians with unbiased mortgage information and financial calculators so they can make informed decisions when it comes to their homes and financial lives. Flanders hopes that with the help of their website “more Canadians will feel comfortable with the decisions they make regarding their mortgages.”
Tahnya Kristina, CFP
Photo by camknows
Posted: December 11th, 2013 under Mortgages.