A second mortgage can be an excellent financial tool in Canada, enabling access to equity in the home for major expenses, investments, or debt consolidation. This decision is not to be taken lightly since it comes with potential risks coupled with benefits. Understanding the key pros and cons will help you determine whether a second mortgage is the right fit for you.
What Is a Second Mortgage?
A second mortgage is a loan secured against the equity in your home, taken generally in addition to your primary mortgage. Home equity refers to the difference between the market value of your house and the balance of your outstanding mortgage. During payments or if your property appreciates, thus increasing in value, your equity increases to possibly become an accessible source of funds.
6 Important Pros of a Second Mortgage
Access to Lower Interest Rates
One of the main advantages of a second mortgage is that most of them offer better interest rates compared with credit cards or other forms of loan. Since your house secures the loan, the lender then assumes less risk, equating to better terms for you. This makes it a great option to consolidate high-interest debt or finance large projects.
Flexible Use of Money
Second mortgages are very flexible. The money that you borrow can be used for almost whatever purpose:
- Paying off credit card debt
- Home Improvement
- Funding your child’s college education
- Covering an unexpected medical bill
A second mortgage is a very effective financial tool because the funds lent can be utilized for a number of purposes.
Access to Substantial Funds
Another great advantage of a second mortgage is that one may borrow quite a large sum of money. Lenders may allow you to borrow up to 80% of your home’s equity, which will rise to tens or hundreds of thousands of dollars depending on the value of your property. These can be used for various purposes, including renovating one’s home, paying off high-interest debts, or even funding one’s child’s education.
4 Relatively Lower Interest Rates than Unsecured Loans
Second mortgages usually have a lower interest rate than unsecured loans, which may include credit cards and personal loans. Because your home acts as the collateral for the loan, lenders view the loan as less risky and are thus capable of offering reduced rates. This may make it an attractive option to consolidate debt or finance significant expenses.
Potential Tax Benefits
In Canada, you might be in a position to deduct the interest on your taxes if you use funds from your second mortgage for investments, such as buying rental properties or stocks. This would be an added financial benefit, but it is best to consult with a tax professional to make sure you qualify.
Freedom of Use Loan
Second mortgages, however, differ from all other loans in terms of their unrestricted uses. You can spend the funds on whatever other need you have, such as starting a new business, financing your dream vacation, or paying for medical bills; it is all your choice.
6 Significant Cons of a Second Mortgage
You May Lose Your Home
A second mortgage uses your house as security, and your inability to pay may result in foreclosure. You face grave consequences should there be an unexpected change in your financial status, such as suddenly losing your job or incurring unforeseen expenses.
Higher Interest Rates Than First Mortgages
Second mortgages have lower rates than unsecured loans but higher rates than your first mortgage. This is because lenders are taking on more risk, meaning that in the case of default, the lender for the first mortgage will get paid before the lender for the second mortgage.
Additional Fees and Costs
Second mortgages are fraught with many additional upfront expenses: appraisal fees, legal fees, and possible lender fees. These can add up and make the loan less attractive if your borrowing needs are not significant.
Possibility to Over-Borrow
Having a large sum of money at one’s fingertips can invite overspending or bad financial decisions. Second, mortgage money, if not used judiciously, may make the situation more financially precarious rather than easier to bear.
Conclusion
Taking out a mortgage on a second property can help you support your adult children’s housing needs, buy the ideal cottage getaway, or start your first rental business. But not everyone is a good fit for second property financing. Understand your financial situation and consider seeing a mortgage broker or financial expert before committing to a second property.
