What’s a “second mortgage”? Let me explain a first mortgage vs a second mortgage!
First mortgage vs second mortgages—what does that mean? These terms refer to the order in which the loan or the mortgage is registered on the title of the property. For example, if you buy a house and you get a mortgage to buy that house, that’s the first mortgage. This is because it was the first thing registered. Then when you sell the house this first mortgage gets paid off first and you get what’s left over.
A second mortgage is a mortgage that comes onto the title after the first mortgage. It’s in second position and typically a second mortgage will have a higher interest rate. This is because you’re probably getting a private mortgage for your second mortgage. A private mortgage can be in first position too but for this explanation, we’ll say it’s second.
Why would the interest rate be higher on a second mortgage? The interest rate is higher because from the lender’s perspective, a second mortgage is riskier. If you stopped paying the mortgage on the first mortgage and that property went into foreclosure and the property gets sold, the first lender gets paid out first. The second lender gets paid out afterwards and there may or may not be enough money to get paid out in full. So that’s why there is a higher interest rate.
When might a person want a second mortgage? Let’s say you bought your home in 2021 and you have a really good interest rate—like, 2% for five years. But you want to renovate your house. You don’t want to refinance that mortgage because you’re going to lose your interest rate and it might be good for another year or two. So if you need $30,000 or $40,000 to redo your kitchen, you would borrow that money as a second mortgage. This assumes that there’s enough equity in the property that the second lender would feel safe giving you a mortgage.
Long story short, you get your kitchen renovation done now. Then when your mortgage is coming up for renewal, you could refinance to get a whole brand new first mortgage. Then you pay off that second mortgage, get rid of the high interest rate and away you go. Now you can have people over for dinner and feel good about your kitchen!
If this sounds like something you might be interested in doing, give me a call!
I also have a helpful video about why you should get a second opinion before renewing your mortgage.
About Jason Scott, Edmonton Mortgage Broker
Looking for a personalized mortgage solution? As an Edmonton Mortgage Associate, I’ll be your trusted partner who will help you get the right mortgage for your family home or Investment property. I’m Jason Scott, and I’ll be your Mortgage Broker Edmonton.
