A second mortgage is a loan in addition to the first mortgage that you have already registered for your property.
Second mortgages are relatively riskier for the lenders so they are generally higher. Here is an example to explain why.
Imagine the value of your home in Canada is $350,000 and you have already registered a $200,000 loan for your home via a mortgage company. The remaining will be $150,000. This is the part of your home value that you have not received a mortgage for, and is technically referred to as ‘equity’. Therefore, you don’t owe this much of your home value to a mortgage company.
Now suppose you need another $100,000. You can then ask for a $100,000 loan because your home equity is $150,000 which is more than what you are requesting for. This new amount that you get is called a 2nd mortgage. Sometimes second mortgage is also called home equity line of credit or home equity loan, but they are practically second mortgages if they are taken in addition to your first mortgage.
In Canada, in order to get a better interest rate, your second mortgage must be insured and the mortgage default insurance premium will be then added on top of your basic loan amount. Although the amount of your second mortgage increases, you will usually have lower rates for you mortgage with lower monthly payments when you insure your second mortgage.
In a fixed rate mortgage, the interest rate for your mortgage is fixed for an appointed period of time which in Canada is usually between 6 months to 25 years. The good thing about a second mortgage with a fixed rate is that you know how much you are paying for a set period of time, also known as ‘term’.
In contrast, you may choose a second mortgage with a variable rate. Therefore, the fluctuation in the interest rate will determine your monthly payment appointed for the principle of your mortgage and what portion to be appointed for the interest. If interest rates go down, more of your payment will help reduce the principal of your second mortgage; if rates go up, a larger portion of your monthly payment will be appointed to cover the interest rather than the principle. Even if the interest rates fluctuate, the payments will be fixed for a period of one to two years.
Because second mortgage rates change frequently, you many want to choose a longer-term mortgage if you don’t want to involve yourself with the rate changes. Otherwise, a shorter-term mortgage allows you to potentially take advantage of lower rates.
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